Joe Biden declared president-elect, stocks rally

Joe Biden has been declared president-elect, but Donald Trump is refusing to concede. Markets are not particularly fussed and see some clear light – relative clarity is providing a boost to risk assets.

Stocks enjoyed the best week since April, though there was some payback on Friday as traders consolidated gains.

The S&P 500 rallied 7% over the five sessions, but this did come after just about the worst pre-election week for stocks on record. Investors were shifting a lot of flow into lower volatility debt markets ahead of the election to reduce exposure to stock market volatility, and this is now unwinding back into equities.

In particular, the Biden White House and split Congress ought to mean lower rates, lower inflation and this benefits Growth stocks, and gold.

The dollar index has slumped to its weakest since September 1st put tried to rally early on Monday. A weaker dollar is supportive for gold, which broke out past $1,950. WTI (Dec) tracked sideways around the $38 mark.

Stocks in Asia rose, with the Nikkei up 2% and Hang Seng rising over 1%. Stocks opened firmer in Europe with the bullish trend asserting itself as Biden’s triumph seems all but assured.

The FTSE 100 rallied 1.5% to 6,000, whilst the DAX rose 1.7% to 12,700 and the Stoxx 50 returned to 3,250. US futures indicate Wall Street will open higher after a lacklustre session on Friday.

It would take a lot of big and unlikely legal victories for Trump to turn the result now. Recounts are likely as are multiple legal actions – but the lead for Biden is such that it would imply some enormous voter fraud in several states. Safe Harbor Day is Dec 8th, by which date all states need to have decided who’s won ahead of the Electoral College votes on Dec 14th.

The MSCI All Country World Index hit a record intra-day high this morning. A Biden win is seen to be much better for international cooperation, an end to the Trump-era isolation and critically, good for trade with the potential for a reset in transatlantic relations probably the most exciting aspect for investors. Whilst the Democrats won’t go easy on China, the relationship is expected to be steadier and escalation of tariffs seems less likely than under Trump.

According to weekend data Chinese exports jumped 11.4% in October, whilst imports rose 4.7% in USD terms. This was the best export performance since the pandemic and shows the recovery taking place outside of those countries where lockdowns linger.

It’s a good indicator that global demand is picking up in spite of pandemic restrictions in certain areas. This morning saw some decent German export numbers for September (+2.3%), but France’s economy is operating down 12% in November due to the lockdown.

After the relief rally, where next?

The Senate looks to be heading for Republican control, which removes a lot of the regulatory and tax overhang. Georgia run-offs will keep us unsure for a while longer, but the odds favour a very slim Republican majority in the upper house. Gridlock could be good for multiples and earnings longer term, but it’s not conducive to a large stimulus package right now.

And will Biden go for a more aggressive approach to containing coronavirus? We know that the greater the restrictions the greater the economic damage. Europe is enduring this reality again. A Biden win is probably good news for clean energy companies – the president-elect is committed to re-joining the Paris Climate Accord. Scottish Widows is offloading £440m in ESG unfriendly investments – the wind is blowing only one way.

Sterling was holding well above $1.31 but dollar weakness aside, the pound remains susceptible to a significant amount of Brexit headline risk.

Boris Johnson and Ursula von der Leyen said ‘significant differences remain’ in trade talks, citing fishing and the provisions for a level playing field. All the showboating and posturing should give way to pragmatism and the realpolitik of securing a deal before the New Year. The current ‘deadline’ is November 15th but talks could well extend beyond this. After tapping on 1.32 briefly early doors, GBPUSD dropped to 1.3140 by around 9am.

The FTSE 100 hit 6,000 and seems to have broken the downtrend. Next to 6,300, or will the downtrend reassert itself? The jump this morning marks a clear move off the 50-day simple moving average at 5,888 and the 100-day simple moving average at 6,011 offers resistance.

FTSE 100 performance fluctuating.

US 2020 Election result poised on a knife-edge

Markets have been whipsawed by competing and conflicting indicators of who will win the 2020 US presidential election.

  • Blue Wave result seems dead with Trump close to victory, but the result is on a knife edge
  • Trump did much better than polls indicated with a win in Florida opening the path to the presidency. Fears of the Republicans losing Texas (38 Electoral College votes) proved unfounded and Trump leads in Georgia (16) and North Carolina (15).
  • Biden called to win Arizona (11), which leaves the key Rust Belt states of Wisconsin (10), Michigan (16) and Pennsylvania to decide the election – exactly as was expected.
  • But these won’t be called imminently and it may take days to decide final outcome, not even considering legal challenges prolonging the agony – A result today may not be possible, though if Biden clears 270 it seems difficult for Trump to mount a serious legal challenge.
  • Bonds moved fiercely overnight with US 10s in a range of 0.945-0.791
  • FX moves were significant, with GBPUSD across two big figures, from a high of 1.3140 to under 1.2930
  • DXY rises to highest level since end of Sep at 94.34, before it pared gains to retreat under 94.
  • Gold whipsawed between $1916 and $1880 before retracing back to around $1890.

Ahead of the European open, Donald Trump sent futures lower by declaring victory in the election before all the counting is over. He played the voter fraud card and this undoubtedly unsettled markets, since a long and protracted battle in the courts is precisely what investors do not want.

Trump spoke of trying to protect the “integrity” of the vote – choosing to frame this has he being the defender of the constitution, not the usurper. Trump said that “we have already won this” and that “we will be going to the US Supreme Court”, whilst talking about the Democrats “disenfranchising” voters. Nevertheless, Trump can still win this vote, whilst European cash equity markets recovered some poise after the first hour of trade to claw their way back to the flatline, whilst US futures remain broadly positive, led by Tech.

Risk bid on US election day

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.  

Markets poised for US election uncertainty

Lockdowns across Europe seem fully discounted now – markets haven’t really reacted massively the UK government’s caprice. Stocks hugged the flatline in early trade Monday as all eyes shift now to the presidential election, with some bid actually coming through after the initial downtick. The elephant in the Oval Office is Donald Trump: a victory in the election this week for the incumbent would surprise just about everyone. I say this since strategists everywhere seem to be discounting the possibility. Some of the pre-election selling we have seen could be more about an expected Biden win and what that would do to tax and regulation. Polls show a healthy Biden lead for sure but are tighter in the battleground states. Moreover, there is likely a silent group of shy Trump supporters who would never admit to voting for the president. On the other hand, Biden has a clear lead in four key states – Wisconsin, Pennsylvania, Arizona and Florida, a new poll shows, which would see the Democrat through with ease. It’s still a contest though, and with states being called or mis-called on inaccurate exit poll figures throughout the election night we ought to prepare for some significant volatility over the course of the evening.   

 

The main thing Wall Street wants is to get the election out of the way and get some clarity. As such a contested election would present the greatest near-term risk to equities, which may be reflected partially by the Vix going above 40 last week. This is a level that needs to be watched, though returns post a spike like this tend to be positive. 

 

But investors may not get the result on election night. The sheer volume of mail-in votes in those states which require counting to only start from Nov 3rd (Michigan, Pennsylvania), could delay the result even without the risk of legal action. Donald Trump is clear he’s going to fight where he can, saying in reference to Pennsylvania: “The night of — as soon as that election is over — we are going in with our lawyers.” Now there is a very large difference between a delayed result and a contested result, but the latter would almost inevitably ensue from the former as it all centres on the legality of postal votes. The worry for investors is that neither side accepts defeat.

 

As detailed in our election playbook, in the event of a Democrat clean sweep, whilst it would generate a large amount of fiscal stimulus (+ve for stocks) the expected hike to corporate taxes and capital gains tax creates policy uncertainty and could generate additional volatility into the year-end as investors liquidate positions to realise returns prior to the tax rises. There is also chatter about a financial transactions tax, which would be a negative for risk. 

 

And, moreover, there is a key question that will remain unanswered this year if Biden cleans up: Will the gigantic stimulus that the Democrats will unleash flood the US economy with too much liquidity at a time of strong economic recovery, creating inflation and leading to monetary policy uncertainty? In other words, do we get so much fiscal stimulus that the Fed becomes cornered and is forced into hiking rates much sooner than planned?  

 

Stocks closed out a bad week on Friday in the red again, with the S&P down 1.2%. There was a decent bull rally into the close though to leave it 36pts above the low at 3,270. European stocks were mixed in early trade on Monday.  

 

The new lockdown in England is a big problem for some and good news for others – the slow recovery from the crisis just took a giant step backwards, but online will do well. Primark owner Associated British Foods warned it will suffer £375m in lost sales as a result of stores being closed here and across Europe in November, but this assumes Dec 2nd will be the day restrictions are lifted. If I were a betting man, I’d say it’s more likely to later, despite what the chancellor says. Shares fell 3%. Meanwhile Ocado shares jumped 8% as it raised its full year earnings guidance to £60m from £40m. This should be a positive for MKS but it’s lower this morning. Just as the first lockdown accelerated online shopping habits, the second lockdown will undoubtedly offers some additional near-tern support for Ocado stock. 

 

The US dollar remains well bid above 94 after breaking out of the October range and it looks to test the upside of the sideways channel formed by the September peak at 94.82. Dollar strength pushed cable back to 1.2860, with Brexit barely being mentioned right now despite the very tight timetable. Expect some headlines this week on that front to disrupt. We also have the Federal Reserve and Bank of England meetings to contend with. Lots of chatter around negative rates but the MPC is much more likely to deliver a QE boost to support the economy. The decision to lock down the economy in November gives all the cover the central bank needs to do more. Data like the nonfarm payrolls and global PMIs this week can be largely ignored now we’re clearly into a new phase of the pandemic lockdowns and the election will dominate.

Volgende week: Special Amerikaanse verkiezingen

De Amerikaanse presidents- en Senaatsverkiezingen zijn komende week de belangrijkste gebeurtenissen, maar we kijken ook naar vergaderingen van de Federal Reserve en de Bank of England.

Verkiezingen 2020

Bijna alle aandacht richt zich op de Amerikaanse verkiezingen dinsdag. Hoewel normaal gesproken een uitslag verwacht wordt kort na sluiting van de stemhokjes, is niemand er zeker van wanneer we precies zullen weten wie straks in het Witte Huis trekt. Joe Biden voert de peilingen aan op nationaal niveau, maar in de belangrijkste swingstaten, die bepalend zijn voor de uitslag, is zijn voorsprong kleiner. Donald Trump zou zomaar voor een verrassing kunnen zorgen. In de Senaat is het ook een close race en de uitslag kan belangrijk zijn voor de markten, omdat hij invloed kan hebben op het op korte termijn bereiken van een stimuleringsovereenkomst.

De verkiezingsuitslagen in individuele staten kunnen van het ene op het andere moment leiden tot volatiliteit in prijzen van futures en potentieel op sommige FX-markten. Sommige staten tellen de persoonlijk uitgebrachte stemmen vóór de poststemmen, en andere staten accepteren poststemmen nog na 3 november (zo lang ze gestempeld zijn op deze datum), waardoor een inaccuraat beeld kan ontstaan als de stemlokalen sluiten aan de westkust. Als er geen duidelijke uitslag is, of de uitslag betwist wordt, is te verwachten dat de volatiliteit stijgt.

We komen maandag met een speciaal verkiezingswebinar en volgen de reactie van de markt woensdag live.

Federal Reserve

Vrijwel direct na de Amerikaanse verkiezingen woensdag, volgt de tweedaagse bijeenkomst van het Federal Open Market Committee (FOMC), waar naar verwachting geen grote beleidsverandering zal worden aangekondigd. De markten zullen zoeken naar meer inzicht in de houding van beleidsmakers ten opzichte van de nieuwe gemiddelde inflatiedoelstelling. De verslagen van de bijeenkomst in september benadrukken dat de rente langere tijd laag zal blijven, maar dat er een zekere flexibiliteit moet blijven op basis van monetaire beleidsintenties en dat niet onvoorwaardelijk vastgehouden moet worden aan bodemtarieven.  Een verklaring van het FOMC en een persconferentie met Jay Powell volgen donderdag.

Bank of England

Donderdag komt ook de Bank of England met een verklaring over de monetaire koers; een negatieve rente lijkt aanstaande. De Bank of England legt momenteel de fundamenten om een negatieve rente in te voeren. In een brief op 12 oktober vroeg plaatsvervangend gouverneur Sam Woods de commerciële banken of ze voorbereid zijn op „een rentepercentage van nul procent, negatieve rente of een gedifferentieerde vergoeding – en de stappen die nodig zijn om dit te implementeren”. In de brief staat ook dat „de financiële sector er klaar voor moet zijn dit te implementeren op een manier die de gezondheid en continuïteit van bedrijven niet schaadt”, en dat „de MPC het raadzaam acht om verschillende opties te kiezen, op grond van de situatie op dat moment”. De brief kwam na de laatste beleidsbijeenkomst waaruit bleek dat de BoE serieus overweegt om negatieve rente in te voeren, terwijl Andrew Bailey zich in bochten wrong om te benadrukken dat dit niet wil zeggen dat die route daadwerkelijk genomen wordt.

Er is duidelijk een debat gaande binnen het Comité voor het Monetaire Beleid (MPC), en dat speelt zich nu ook af in het openbaar. In september maande vice-gouverneur Dave Ramsden tot voorzichtigheid, een dag nadat Silvana Tenreyro had laten blijken voor negatieve rente te zijn. Er lijkt een ideologische discussie gaande te zijn tussen de verantwoordelijken voor de rente, waar deze herfst uitsluitsel over moet komen. Dat zou betekenen dat negatieve rente op zeer korte termijn nog niet aan de orde is, zoals Andrew Bailey suggereerde, maar wel actief wordt overwogen. Nieuwe lockdowns en/of een werkloosheidscrisis in de aanloop naar kerst kunnen een probleem vormen voor de bank, omdat ze het handelen van de MPC onder druk zetten.

RBA

De Reserve Bank of Australia verlaagt tijdens de vergadering deze week de rente mogelijk voor het eerst sinds maart; markten bereiden zich voor op een daling van 0,25% naar 0,1%. De RBA liet de rentetarieven in oktober ongemoeid en handhaafde de 0,25%, maar liet wel doorschemeren dat een verdere daling nog voor dit jaar in het verschiet kan liggen. De RBA zei monetaire versoepeling vast te houden „zo lang dat nodig is” en de rente niet te verhogen voordat de werkgelegenheid groeit en het duidelijk is dat de inflatie langdurig binnen de bandbreedte van 2 tot 3% blijft. De bank hield zijn opties open en benadrukte aanvullende versoepeling van het monetair beleid te blijven overwegen.

Economische gegevens

Veel, zo niet alle, economische data zijn verouderd als gevolg van de opleving van het virus en nieuwe beperkingen, net zoals het politieke landschap in de VS waarschijnlijk veranderd is, zelfs als Trump president blijft. Desondanks zullen de markten uitkijken naar de laatste PMI’s en de cijfers over werkgelegenheid buiten de landbouwsector.

Belangrijke economische data deze week

Open de economische kalender op het platform voor een volledig overzicht van alle belangrijke data.

Date  Event 
2-Nov  China Caixin manufacturing PMI 
2-Nov  UK manufacturing PMI 
2-Nov  US ISM manufacturing PMI 
3-Nov  US ELECTION 
3-Nov  Reserve Bank of Australia monetary policy decision 
3-Nov  New Zealand unemployment rate 
4-Nov  US ELECTION RESULTS EXPECTED 
4-Nov  US ADP employment change 
4-Nov  US ISM manufacturing PMI 
4-Nov  EIA crude oil inventories 
5-Nov  Bank of England monetary policy decision 
5-Nov  US weekly initial jobless claims 
5-Nov  FOMC statement and press conference 
6-Nov  RBA statement 
6-Nov  US nonfarm payrolls 
6-Nov  Canada Ivey PMI 

 

Belangrijke cijfers deze week

Denk ook aan onze dagelijkse winstcijfer-specials op XRay voor meer updates

Date  Company   
2-Nov  PayPal Inc  Q3 2020 Earnings 
2-Nov  Estée Lauder  Q1 2021 Earnings 
2-Nov  Mondelez  Q3 2020 Earnings 
3-Nov  Aramco (Saudi-Aramco)  Q3 2020 Earnings 
3-Nov  Ferrari N.V.  Q3 2020 Earnings 
3-Nov  Bayer  Q3 2020 Earnings 
4-Nov  QUALCOMM Inc.  Q4 2020 Earnings 
5-Nov  T-Mobile US Inc  Q3 2020 Earnings 
5-Nov  AstraZeneca PLC  Q3 2020 Earnings 
5-Nov  Bristol-Myers Squibb Co.  Q3 2020 Earnings 
5-Nov  Linde plc  Q3 2020 Earnings 
5-Nov  Enel S.p.A.  Q3 2020 Earnings 
5-Nov  Zoetis Inc (A)  Q3 2020 Earnings 
5-Nov  Square  Q3 2020 Earnings 
5-Nov  Barrick Gold Corp.  Q3 2020 Earnings 
6-Nov  Toyota Motor Corp.  Q2 2021 Earnings 
6-Nov  CVS Health Corp  Q3 2020 Earnings 
6-Nov  Richemont  Q2 2021 Earnings 

 

US Election Playbook: 3 outcomes for trading the market reaction

Election Night Volatility

Volatility, as viewed through the lens of the Vix, has already risen sharply in the lead up to the election but has been largely because of the surge in virus cases, and lockdown measures in Europe in particular, weighing on risk sentiment.

As far as the election itself goes, I think Trump is closer to victory than the pollsters, bookies and financial markets believe, which in itself favours election night volatility as states are called one-by-one, and a big response early Wednesday when European cash equities open to we would assume some clear result.

What also favours a large swing in futures pricing and in some FX crosses will be the way in which calls on individual states are made. With some states processing the in-person ballots before the postal ones are counted, and with some states allowing postal votes to arrive after Nov 3rd (as long as they are postmarked by this date), we could get an inaccurate and uneven sample when the West Coast polls close.

If the polls are correct and show a comprehensive Biden victory, volatility would likely ensue as investors call their accountants to assess their holdings in expectation of much higher taxes. FX crosses to watch will be focussed in the EM space (USDMXN, USDCNH among others) as a Biden win is seen as particularly positive for those currencies.

Outcomes

We’ve included three potentials outcomes (the fourth variant: Trump wins and Senate turns blue has been omitted since if there is a Trump surge it’s hard to see the Senate going Blue).

A little history: The stock market has risen under both Democrat and Republican presidents – stocks don’t really care who’s in charge. Moreover, ongoing monetary policy support underpins the equity market valuations – the Fed is not about to remove the punch bowl.

Whilst longer-dated Treasury yields have started to rise after a period of stagnation this appears to be on the expected increase in the money supply and fiscal expansion which would accompany just about any of the results. We should note that yields are very much within tight ranges and any significant break free to the upside would require a serious bout of inflation (as previously argued this may be the consequence of a vast increase in the money supply).

Fiscal stimulus is coming over the hill whatever the result – the only exception would be a contested result which would of course tend to create heightened volatility and a slower path to stimulus. Fiscal largesse will make a significant difference and we would tend to think that a Blue Wave result would support the largest fiscal expansion of the possible outcomes.

A Biden White House and GOP Senate increases the risk of delay, particularly if some of the new senators don’t feel like voting for huge increase budget increases. A disputed election would need to be resolved in the Supreme Court and Trump has just scored a big win with his new justice.

Whilst a disputed result is possible and would cause the most volatility, it is a) being over-egged since postal votes should not make a big difference in the key states and b) it certainly won’t come to the point where Trump refuses to leave office. Leaving the unedifying and frankly undesirable prospect of a disputed result aside, we can look at the three main possible outcomes and what these mean for the markets.

Red Rum: Trump win, Senate stays red

  • Less stimulus – not the $3tn Heroes Act but something that is a little short of what the market had been hoping for. Removal of tax and regulatory uncertainty supportive of equity valuations, however.
  • Nominal yields down and real yields more negative favours gold + growth stocks + multiple expansion: more upside for the S&P 500 with the removal of the expected increase in corporate and capital gains taxes and reduction in policy and regulatory uncertainty.
  • Growth beats Value status quo
  • Dollar could outperform in the near term with a strong post-election euphoric bounce until stronger economic, monetary and fiscal trends are reasserted and drag on USD – however, trade tensions could be a headwind for USD bears.
  • Policies supportive of US shale and further drilling, increasing domestic supply. Less stimulus could be –ve for demand, therefore WTI prices could tend to fall, especially as it looks like the winter is set up for inventory builds. Global demand will matter more for commodities in general and even for oil there are greater forces at work than who’s in charge.
  • Reinvigorated Trump with Senate support would likely see the president up the ante on trade, which would tend to be negative for emerging markets and boost the USD. It could also be a negative for European equities and the euro.

So Mauve: Biden win, Senate stays red

  • Less uncertainty over policy likely to support equities, whilst a Biden presidency ought to see some degree of a reset with trade partners that would boost sentiment and corporate earnings.
  • Stimulus delays could create near-term volatility but it would be in no one’s interests to drag their feet for long given any ballot box risk would be two years away.
  • Tax uncertainty removed = +ve for equity valuations.
  • Improvement in trade relations with partners and China could see EM supported as well as European equities/currency – would also tend to boost US corporate earnings
  • Not as bad for the dollar as a Blue Steal result with trade reset likely to support flows, also less fiscal expansion a factor, but USD seen weaker in this outcome as part of broader downtrend.
  • Little impact on commodities – arguably less stimulus creates headwind to recovery but broadly speaking the global post-Covid expansion will matter more, as well as the relative weakness of the dollar.

Blue Steal: Biden win, Senate goes blue

  • It’s a reflation and redistribution thing – more stimulus = more spending + higher prices (tax reform nails the rich who have less marginal spending power than poorer folks)
  • Timing is everything: do tax hikes get applied instantly and retroactively – which could spark selling into the year-end before stimulus floods through in the spring of 2021.
  • Lots of stimulus is a +ve for stocks and favours Value stocks – less overall potential for the broad market but tilted in favour of Value again over Growth.
  • Remember the fiscal expansion is two-fold: Covid relief and massive infrastructure boost.
  • Rising nominal yields, steepening of the curve = bad for gold (unless and until inflation appears) + good for banks.
  • Expected hike to corporate taxes and capital gains tax creates policy uncertainty and could generate additional volatility into the year-end as investors liquidate positions to realise returns prior to the tax rises.
  • Higher corporate taxes and regulatory uncertainty increases risk premium for equities, whilst could see nominal yields rise and reduce the TINA appeal for equities.
  • Seen as more negative for USD with fiscal expansion and tax/regulatory regime weighing on demand for US equities.
  • Over the medium to long term, a Democrat clean energy push would restrict US output and reduce demand for oil products. Larger stimulus would boost demand near-term – also watch as to whether a Blue Steal result leads to a deal with Iran that brings more production onto global markets.
  • Result likely +ve for emerging markets with dollar weaker, better trade relations – look to USDMXN, USDCNH upside in this scenario.
  • Better trade relations with partners a +ve for Euro (see weaker dollar narrative) and for European equities, particularly cyclical names.

Key question that will remain unanswered on Nov 4th: Does the gigantic stimulus that Biden and company would unleash flood the US economy with too much liquidity at a time of strong economic recovery, creating inflation and leading to monetary policy uncertainty?

In other words, do we get so much fiscal stimulus that the Fed becomes cornered and is forced into hiking rates much sooner than planned?

Polling

Polling continues to show Joe Biden commanding a roughly 7.5pt lead nationally, whilst in the key battlegrounds, the lead is less than half at 3.4pts.

There are ranges and differences between states, but the broad picture remains that a Blue Wave is to be expected if we take the polling data as accurate. However, on a personal basis, my belief is that Trump has many ‘quiet’ supporters who do not show up in the polls, and many of whom will have been affected by the unrest over the summer. The Senate race is extremely tight right now but still indicate the Democrats just taking back control.

Latest Presidential polls as of Oct 29th, from RealClearPolitics (who power our election tracker):

Battleground   Biden   Trump    Spread  
Pennsylvania   49.5   46   Biden +3.5  
Florida   48.4   47.9   Biden +0.5  
Georgia   47.2   47.2   Tie  
North Carolina   48.4   47.7   Biden +0.7  
Arizona   47.8   46.5   Biden +1.3  
Minnesota   48   43.3   Biden +4.7  
Iowa   47.7   46.3   Biden +1.4  
Wisconsin   50.3   43.9   Biden +6.4  
Ohio   46.2   46.8   Trump +0.6  
Michigan   50.6   42.4   Biden +8.2  
Texas   45.4   48   Trump +2.6  
Nevada   48.3   43.7   Biden +4.6  

Sector & Single Stock Volatility Picks

Within our Biden20 basket of stocks which could do well from a Democrat clean sweep, green energy stocks look most exposed to downside if there were a Trump victory since it would materially affect the expected regulatory backdrop for clean energy investment.

Biden plans to set the US on an “irreversible path” to net-zero carbon emissions by 2050, with an ambitious goal to build a carbon pollution-free power sector by 2035. The proposals clearly imply a far more aggressive shift away from fossil fuels than a Trump administration would pursue.

The proposals would also involve upgrading millions of commercial and residential properties over 4 years to increase energy efficiency, with among other things the installation of solar panels, which is a potentially huge growth area (Sunrun, Solaredge, FirstSolar in our Biden20).

We also note a positive policy position on EV (Tesla, Nikola) with plans to invest in 500,000 electric vehicle charging stations. European clean energy stocks would also benefit from a Biden win, whilst automakers like VW and Daimler could benefit too.

As far as the corporate tax agenda goes, there could be several companies who benefitted most from the 2017 tax cuts who see earnings cut in 2021 in the event of a ‘Blue Steal’ result. Among European stocks, those with a large exposure to US sales like Ferguson, CRH, Ashtead could see a reduction in EPS due to tax hikes – however, it is likely that massive infrastructure spending and stimulus would offer significant support to those names in particular.

Our Trump20 Blend includes some of the largest US stocks which benefitted from the 2017 tax cuts (and therefore could see the worst EPS haircut in the event of a Biden win and Democrat Senate).

These include Nvidia, Netflix, Salesforce.com, CSX, Boeing, Union Pacific and ServiceNow.

Race for the Senate: The Key Battlegrounds

As this election cycle enters the final stretch, the battle for the upper chamber will become increasingly prominent. No matter who resides in the White House come 2021, the success or failure of their term will largely rest on the Senate’s shoulders.

Here, we will take each of the competitive races in turn, and seek to give an indication of what to expect on election night. As it stands, the Democrats are likely to retain 45 seats and Republicans 44, with 11 key races deciding the balance of power.

Georgia 1: Perdue vs Ossoff

  • The incumbent Republican is currently 2.3% ahead, according to the RealClearPolitics polling averages
  • FiveThirtyEight gives Perdue a 72% chance of re-election
  • Ossoff set a Georgia record for the month of August, raising $4.7 million
  • Overall, whilst it is likely to be far closer than FiveThirtyEight appears to suggest, given a recent tightening of poll numbers, the Republicans have the edge in this race

Iowa: Ernst vs Greenfield

  • The incumbent Republican is down by 4.8%, according the RealClearPolitics polling averages
  • FiveThirtyEight gives the Democratic challenger a 53% chance of victory
  • Thursday night’s debate could well boost Greenfield’s chances of success after her opponent was unable to recall the break-even price of soybeans – a cardinal sin in Iowa politics!
  • Overall, whilst this race may be one of the closest in the cycle, the momentum is against Ernst and the Republicans.
  • The Democrats will re-take the Senate seat they lost in 2016

Maine: Collins vs Gideon

  • The Democratic challenger in this race is up by 4.2%, according to the RealClearPolitics polling averages
  • FiveThirtyEight gives Collins’ a 37% chance of a fifth term
  • This race has turned into a referendum on Senator Collins, with her record under scrutiny from the very beginning
  • The incumbent’s troubles have been exacerbated by the fundraising juggernaut established by her Democratic challenger, who has outraised Collins by $7 million this election cycle
  • Undoubtedly another close race. However, Collins has failed to shed the negativity surrounding her actions during the Kavanaugh hearings and will be punished for it on November 3rd. A second Democratic pick up

Michigan: James vs Peters

  • The Democratic incumbent in this race is up by 5.1%, according to the RealClearPolitics polling averages
  • FiveThirtyEight gives Peters a 79% chance of re-election
  • The Republican challenger here is likely to outperform President Trump on November 3rd, and has managed to maintain fundraising parity with his opponent thus far
  • Despite this, the Democrats are highly favoured to retain this seat, given the President’s poor polling at the top of the ballot

North Carolina: Tillis vs Cunningham

  • The Republican incumbent is down by 3.9% here, according to the RealClearPolitics polling averages
  • FiveThirtyEight gives the Democrats a 65% chance of picking up this seat
  • In a bizarre turn of events this month, the Democratic challenger was embroiled in a sexting scandal, and subsequently saw his poll numbers increase healthily – yes really
  • Given both the position and direction of recent polling, the Democrats are the likely winners here. Tillis could still stage a comeback though, if he were to conjure up a sex scandal before November 3rd and benefit from the same strange phenomenon that has helped his opponent…!

South Carolina: Graham vs Harrison

  • Polling in this race has been very erratic, and so a polling average is difficult to produce. The most recent polling available has Graham up by 6%, although this had been preceded by a succession of polls which had the race tied
  • FiveThirtyEight gives the incumbent Republican a 77% chance of victory
  • This race has seen gaffe after gaffe on the Republican side, with Senator Graham referring to ‘the good old days of segregation’ in a recent Senate hearing and breaking federal law by soliciting donations from Capitol Hill
    Despite Graham trying his very best to lose this race, the pro-Republican demographics in the state will see him crawl over the line

Arizona: McSally vs Kelly

  • The Democratic challenger is up by 8% in this race, according to the RealClearPolitics polling averages
  • FiveThirtyEight gives Kelly an 80% chance of victory
  • This race is especially important, given that it is a special election. This means that the victor will not have to wait until January to be sworn in and could change the balance of power in the Senate within weeks of election day.
  • The Democrats have had a sizeable lead in this race from the beginning, despite McSally’s quasi-incumbency – another Democratic pick up

Colorado: Gardner vs Hickenlooper

  • Polling in this state has been infrequent, but has shown consistently large leads for the Democratic challenger
  • FiveThirtyEight gives the incumbent Republican a 21% chance of retaining his seat
  • The Cook Political Report recently shifted this race from ‘toss up’ to ‘lean democratic’
  • Everything appears to point towards another Democratic pick up here

Montana: Daines vs Bullock

  • The Republican incumbent is up by 3.3% here, according to the RealClearPolitics polling averages
  • FiveThirtyEight gives him a 68% chance of retaining this seat
  • This race would usually not be competitive, but the Democratic challenger is a former two-term Governor of the state. Having won state-wide elections twice before, this is now on the Democratic hit list, albeit on the more ambitious end.
  • This is another race whereby the in-built Republican advantage is likely to prove too much, especially given that we are in a Presidential election year. A closer-than-normal election, but Republicans will retain.

Alabama: Tuberville vs Jones

  • The Republican challenger here is up by double digits in many polls
  • FiveThirtyEight gives Tuberville a 75% chance of victory
  • The fact that the Democrats won this seat in the first place was due to allegations of sexual assault made against the Republican nominee. Even so, Jones only won that election by 1.5%.
  • Having taken the bold strategy of nominating a candidate not accused of sexual assault this time around, the Republicans will be rewarded at the ballot box – a Republican pick up.

Georgia 2: Loeffler vs Collins vs Warnock vs Liberman

  • This race is complicated by the fact that it is a special election, and that no candidate is likely to receive 50% of votes cast. This means that a run-off is highly likely, which would take place on January 5th.
  • FiveThirtyEight gives the Republican candidate (whoever that may be) a 51% chance of victory in January
  • This race is highly unpredictable, given that four candidates are currently in the running. If forced to make a call, Republicans just about have the edge in this race. The special election will take place as a standalone, without the pulling power of a Presidential race. Turnout will fall and the Republicans will squeak by. However, if Trump is defeated in November, and does a lot of controversial things on his way out, it could easily swing this race for the Democrats.

Overall: Democrats 51 Seats Republicans 49 Seats

Blonde Money: US Presidential Election – It’ll be Alright on the Night

Many expect November’s election results to be chaotic, with predictions that coronavirus and political polarisation will result in recount requests and mail-in voting delaying results by weeks.

In reality, the logistics and legislation that underpin the voting process mean a delayed result is very unlikely.

From an electoral perspective, the 2020 election may even deliver quicker results than normal. Most swing states start counting mail ballots before polls close on election day.

Florida, for example, starts as early as October 12th. This year, as many as half of voters will vote early or by mail, reducing the amount of ballots that need to be tallied after polls close and effectively giving vote counters a head start.

But what about late ballots that the United States Postal Service itself warned might not make it in time?

BlondeMoney has ranked all the states by how winnable they are for President Trump, and of the 14 key swing states, half will only count the ballots if they’re received by election day.

That means that it doesn’t really matter if people leave it late – their vote won’t be included. If anything, these dire warnings will prompt people to return their ballots earlier, which once again will help ensure they’re processed sooner.

But what if the very last minute voters shift the dial? After all, on election day four years ago, around 13% of voters were said to be undecided. It was this pool of untapped voters that Trump managed to swing in his direction in a late surge, helping to confound the polls.

But this time around, there are two candidates that everyone already knows.

Biden’s experience and Trump’s conspicuous presidency mean most of the electorate have already made up their minds.

Currently, just 7% of voters are said to be undecided. Typically this falls to 4-5% by election day. Given current poll margins that put Biden ahead by 4 to 7 percentage points in the rust belt swing states, that would mean Trump would need all those voters to break for him, plus send in their ballots on election day itself, for any delayed ballots to move the dial.

Logistically, there’s similarly little reason to anticipate late results. Every state has historic experience with mail ballots, and the primaries in early 2020 provided a useful dress rehearsal. Rather than learn from scratch, therefore, states simply need to scale up their mail counting apparatus.

While social distancing means vote counters will likely be fewer on election day, possibly slowing result delivery, the fact that many mail votes will have already been counted offsets this to a helpful extent.

Finally, there is the threat of a delay due to contested ballots. This is unlikely because of the rigid recount laws in the swing states. In the three swing states with those all-important big electoral college votes, recounts would be tough.

In Wisconsin, a 1% margin is needed before candidates can request recounts.

In Florida and Pennsylvania the margin for an automatic recount is just 0.5%. These wafer-thin margins look unlikely given current polling. In any case, contesting the result has its political limits.

A sore loser candidate might want to keep recounts going, but if there’s a clear winner across the country, the political pressure will limit their ability to do so.

Overall, a significant delay to results beyond November 3rd is very unlikely. Early counting of mail ballots will likely accelerate, not hinder, electoral delivery, while this election’s wide margins mean mail votes are unlikely to seriously influence the results.

Coupled with each state’s logistical preparedness for mailed ballots and the bedrock of stringent recount law, the possibility of delay seems more and more remote.

Ultimately, for mail votes to delay results, significantly closer polls are needed.

Election update: Blue-nami flips to consensus bull catalyst

US presidential election update: Bank of America strategists say the Blue-nami outcome, which had been initially considered negative for equities, is being priced in better by the market and may now be a positive. “Blue wave election outcome (Democrats winning) has curiously flipped from consensus bear to bull catalyst in recent months,” they say. 

The S&P 500 corrected through September, flushing out some of the weaker hands and allowing longs to cautiously rebuild as the market traded the 3200-3400 range. The recent upside break came despite negotiations around a broad $2.2tn stimulus package all but breaking down entirely. In this period polls have reverted to showing a greater likelihood of a Biden win and odds shortening on a Democrat clean sweep. 

As noted in our election playbookthere are lots of reasons why the market could really like a Biden presidency, even if tax and regulation could be a problem.  

Clean sweep

Ultimately though it may matter less in the long run who enters the White House than whether the Senate turns blue or stays red. Unusually, the economy may benefit more from unity than the current polarisation – the normal idea that gridlock in Washington is good, because it stops politicians from interfering with the free market, doesn’t quite wash this time. 

The pandemic has upended the norms and the economic backdrop to this election. Cohesion in Washington would likely deliver the kind of fiscal stimulus required to flood the economy with money and get the wheels turning again. 

A Democrat clean sweep would probably result in a far larger package of support and therefore deliver a much stronger stimulus than we would anticipate if Trump wins and the Senate remains in Republican hands whilst the House of Representatives stays blue. Biden’s plans to stimulate the economy involve enormous spending pledges – and to be fair, an increase in the budget deficit is exactly what the economy needs right now. The Federal Reserve has already said it will not get in the way by raising rates should inflation emerge – a major policy shift announced in August that has huge implications for the economy and the application of fiscal policy. 

Wall St or Main St?

Joe Biden would raise taxes, which is supposed to be bad, but Trump’s tax cuts disproportionately benefited the rich, large corporations and people who own stocks. This does not generate additional consumer spend in the same way as a more evenly distributed tax cut. To borrow a line from a leading economist, how many additional swimming pools did Jeff Bezos put in because his tax rate fell under Trump? 

JPMorgan conducted an investor survey recently: 79 per cent said the worst-case scenario would be a Democrat president and Senate, whilst 49 per cent said the best would be a Republican president and Senate. But that may be more about a fear of regulation (and higher taxes) than a belief that a Biden presidency and Democrat clean sweep would be bad for stocks. 

Meanwhile the BoA report also highlighted how renewable energy stocks may front run a Democratic victory in presidential and Congressional elections. Clean energy stocks make up a large part of our Biden20 Blend. 

Stocks sink as Trump tests positive for Covid-19

President Trump and First Lady Melania have tested positive for Covid-19. How has the market reacted, and what does this mean for the US Presidential Election?

Stay on top of the polls and all the latest election news with our dedicated US Presidential Election site.

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