Risk bid on US election day

Morning Note
US Presidential Election

Dollar down, nominal yields up, risk bid: has the market already priced in a Democrat clean sweep? Equity markets braced for the election with a strong showing on Monday, recovering ground after last week’s drubbing, and extended gains on Tuesday morning. There is a strong bid for risk early doors, with stocks in Europe rising +1%, the dollar down ~0.5% to 93.75 from 94.30 at yesterday’s highs, and WTI crude oil (Dec) up +1% and touching on $38 as it continues to break out to the upside. The FTSE 100 has recovered 5,700 on broad based gains with only really ABF falling on a dividend cut. The mentality right now is to buy the dip ahead of the election.

 

Is this greater confidence about a Biden win, or simply a bit of buying on oversold conditions from last week’s decline? It’s hard to really say – the election looms and we are expecting volatility as results come through later. Certainly a clean result on the night is what markets are hoping for – whether it’s Biden (higher yields, Value positive) or Trump (Yesterday, the S&P 500 rallied over 1.2% to reclaim its 100-day simple moving average at 3310 by the close. Value sectors prospered and led tech, perhaps on expectations of a Biden triumph leading to stimulus and infrastructure spending.   

 

Voting in the US presidential election ends today – most ballots have already been cast. Watch for the early call from Florida – almost every president for the last 100 years has won this state and it remains too close to call. Biden leads in several key states and takes a 2.8pt lead in the battlegrounds heading into polling day. Now we turn to the results – be careful with exit polls – they don’t have the best track record. Polls in Florida close at 7pm EST (midnight GMT), so we should start to see markets moving after this on calls being made by pollsters and forecasters. From 8pm we start to get a feel for the rust belt states of Ohio, Pennsylvania, Wisconsin and Michigan – all states Trump needs to win. 3 of those 4 should do it if Florida goes red along with Georgia. But ensuring a clean picture of who’s won will be even more challenging this time due to the large number of postal votes. Delays will be inevitable, but it is unclear whether this is material – if Biden performs as the polls indicate it won’t matter much.  

 

Donald Trump has already suffered two defeats, after judges rejected Republican attempts to nullify thousands of early votes cast in Texas and Nevada. Mr Trump has already said he will throw his lawyers at Pennsylvania after the Supreme Court extended the deadline for mail-in votes. It tends to point to a real prospect of a disputed result if things are tight on the night. 

 

The Reserve Bank of Australia eased as expected with a 15bps cut to the cash rate to a new record low of 0.1%, whilst it also lowered the three-year yield target and its Term Funding rate to 0.1% from 0.25% as well. The RBA also pledged to buy A$100bn worth of bonds over six months as part of an expanded QE programme. Governor Philip Lowe stressed the RBA is not financing the government and that negative rates were “extraordinarily unlikely”. Nevertheless, the path of the global economic recovery remains patchy and the RBA may decide to expand its QE programme further still.