US Elections: Bye Bye "Blue Wave"?

4 November, 2020

It's still too early to make a decisive call, but markets appear to be paring back hopes for the so-called "blue wave". Expectations for a landslide win for Democrats, as had been priced into US equities in the first two trading days of the week, and indeed over recent weeks barring the selloff in late October, have not been vindicated. With both President Trump and former vice-president Joe Biden racking up easy wins early on election night, the jury is still out at the time of writing for key battleground states such as North Carolina, Georgia, Pennsylvania, Wisconsin, and Michigan.

Judging by the initial market reaction, investors seem to be expecting the status quo be maintained, not just in the makeup of the US government, but also in stock markets. The US Senate could still be a deeply divided chamber, which could slow any passage of fresh US fiscal stimulus. Such prospects are prompting equities to fall back on a stalwart to push benchmark indices higher. Nasdaq 100 futures hit limit up, briefly halting trading, before paring gains. The Nasdaq 100 Minis are surpassing gains in the futures contracts for either the Dow Jones or the S&P 500.

The smattering of data in hand isn’t stopping some segments of the markets from trying to pre-empt the final result. The Dollar index’s initial attempt to reclaim the psychologically-important 94.0 handle was also indicative of the dampened expectations that the US Senate will adopt an obvious blue hue. The Greenback is advancing against all of its G10 peers, and its gains are in turn suppressing Gold prices.

To be clear, these moves in the DXY and Nasdaq 100 futures are not enough to break out of recent trends. This presidential race could still throw up a host of outcomes. Biden could still be declared the eventual winner. It’s also entirely possible that President Trump could still get a second term, and avoid becoming the first one-term US President since George H.W. Bush in 1992. Such odds set up a potentially blockbuster finale to the US elections, with these slower-counting states set to have a big say on who will hold the POTUS title over the next four years. And whoever wins the upcoming presidential elections will have a major say on how various asset classes perform over the next four years.

Until we reach a conclusive end the 2020 US presidential election, investors must continue braving this fog of political uncertainty. If there are growing signs pointing to a contested outcome, riskier assets may struggle to hang on to recent gains, to the benefit of safe haven assets. But for now, the wait continues.


Source  
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