Uncertainty As Final Voter Count Continues
With neither candidate having been granted a clear win yet, there is still plenty of uncertainty over how the elections will turn out. Biden is currently leading with 238/270 electoral college votes, with Trump behind at 213/270. However, with the latest counts showing that Trump is leading in the majority of these remaining states (6 out of 7) a Trump win is still not out of the question. Given the record number of mail in ballots this year, the vote count could continue for several more days, exacerbating the uncertainty we are seeing.
Given the uncertainty which is dominating the current environment, the main market reaction so far has been one of risk aversion. Equities have started to reverse from initial gains while the US Dollar has been firmly bid. This theme is likely to continue in the near term while the remaining votes are counted.
Looking beyond to the eventual outcomes sadly, for those of us hoping for firmer directional moves, the conditions are not looking to encouraging. If Biden wins, he will most likley do so with a divided government given that republicans will more than likely have retained the Senate. This means that Biden will face far more of an uphill struggle in terms of affecting policy changes (outside of executive orders) and also in passing the $2.5 trillion fiscal package the democrats have been proposing.
The “Blue Sweep” which many had been forecasting ahead of the elections had, in recent weeks actually started to become something of a preferred option for equities traders. While Biden has talked about raising taxes (both corporate and individual), the emphasis on a huge new stimulus package, alongside expectations of a much less combative global trade policy, had been growing on investors. An improvement in trade relations with China, Europe and Canada would be a major boost for risk appetite and despite higher taxes, Biden’s focus on delivering strong stimulus would be a clear, green light for investors.
Biden Wins, Divided Government
In a divided government, however, Biden will struggle immensely to pass stimulus of that size, given the difficulties seen in negotiations to this point. Furthermore, with the republicans still controlling the Senate it will be much harder to undo any of the policies put in place (specifically around trade) during the Trump era. In this scenario, which will be one of heightened political gridlock, risk appetite is likely to suffer and the Dollar is likely to strengthen on safe haven demand.
Trump Wins Divided Government
Finally, should Trump surprise markets by taking a last minute win, this would likely cause the most volatility at this point. Despite the status quo being maintained, the reduced expectations of a Trump win mean this is now the outside scenario. While stimulus would likely be of a lower level, Trump’s firmly pro-business stance would be a boost for stock markets and likely see a firm increase in upside momentum. Similarly, the Dollar is likely to trade lower amidst a better risk appetite, as markets avoid the unknown of a change in administration.
From a technical viewpoint. Having broken below the bullish trend line from earlier 2020 lows, the S&P has since failed at a retest of the trend line and is now setting into a contracting triangle pattern which has framed the range between 3226.50 and 3586. Price is currently held up at the 3391.50 mid-range pivot. In the near term, the outlook remains bullish with an eventual break higher the preferred play, unless price shifts below the 3226.50, affecting a change in view.
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