US Elections: Uncertainty Persists

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From a ‘Blue Wave’ to a Nail-Biter

Heading into Election Day, markets were pricing a high likelihood of a strong Democrat sweep that would usher in major stimulus early next year, benefiting primarily US equities but also other growth-oriented assets. However, the results so far are much murkier. Currently, neither President Trump nor former Vice President Joe Biden have won enough electoral votes to legitimately claim victory, while control of the US Senate remains unclear (Democrats held on to the House of Representatives, which was wholly expected).

Uncertainty will thus remain over the next few days, if not longer. Results for the presidential election from key swing states such as Michigan and Wisconsin are expected tomorrow, but the crucial state of Pennsylvania will likely not have its final tallies until the end of the week. Moreover, Trump’s news conference laid open the prospect of litigation and Supreme Court involvement, which adds additional layers of uncertainty.

Democratic control of the Senate looks unlikely given that they lost toss-up races in Iowa and Montana and are currently behind in North Carolina (where they were slightly favoured). With at least one Georgia race moving to a run-off in January, there is the strong possibility that control of the Senate will not be known for months. However, even if Democrats manage to gain control, their majority will be slim. Hence, major legislation such as tax reform or expansion of health care is unlikely. A large stimulus may also prove difficult, though rising coronavirus cases and any potential economic slowdown could provide motivation for further fiscal measures.

Markets Whipsawed

As results began rolling in, equity markets were bid up with the S&P 500 futures rising over 2%. Interestingly, the US dollar was bid as well over the early part of the results. However, as it became clear that neither Trump nor Biden would get the 270 electoral votes needed to win, equity markets reversed these moves and then fell further after Trump’s press conference. The US dollar remained bid however, due to its safe haven status.

The Short-Term Picture is Challenging

As we await the remaining votes to be counted, the range of outcomes has narrowed but remains difficult to manage. The next couple of days could provide some clarity, though this is far from guaranteed given the expected litigation. However, it is clear that the Blue Wave scenario is off the table and we will either have a split government or the status quo.

Asset Allocation Impacts

Ahead of the US elections, our highest likelihood scenario was a split government, a risk that markets did not seem to be pricing. Thus, we took steps to de-risk our exposures and reduce our bias towards growth-oriented assets like equities and credit while favouring the US dollar (see our most recent editions of Macro Views and Mi Views for further information). For the short-term, we continue this stance as we await clarity on the election results.

Looking beyond the short-term, the lack of significant fiscal stimulus could prove to be a major drag on the US economy and markets. The rotation and/or reflation trades that a Blue Wave would have augured are also off the table. We are watching the rising coronavirus cases and hospitalisations in the US, as they could reverse some of the progress made on re-opening the US economy. Finally, in terms of positive catalysts, a vaccine remains the primary one, and we are closely tracking progress on it.

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