US election results: let the war of words begin
The US election result is still not clear, one thing is for sure, it’s been a much better night for the President than pollsters and the media had expected. This time last week, President Trump had a 14% chance of winning a second term, however, that has translated into 213 electoral college votes so far and the Republicans took the swing state of Florida, which was a big gain for President Trump’s campaign. At the time of writing, Biden has won 220 electoral college votes vs. 213 for Trump. The winner will need to get 270 votes or more to win. The failure of a blue wave of support for the Democrats that has led to a tighter race than was initially expected, has, so far, not spooked financial markets, but will it last?
How to navigate an unclear election result
The market reaction has been muted so far, stock market futures point to another positive open for European and US stocks, gold is lower and the USD/JPY, a key bellwether for risk, is up 0.44%. This is hardly the market reaction one would expect on the back of what has been called the most important US Presidential election for a generation. However, do not be lulled into a false sense of security. There is a lot of money sitting on the side-lines in this election, waiting for the opportunities that are likely to come up in the coming days and weeks as result is now expected to be dragged out for at least a few days, maybe some weeks. One market that we will watch closely is the bond market. US Treasuries had been bought, their yields fell, as the financial market put their money on a win for the Democrats and Joe Biden taking the White House. The 10-year yield has fallen from 0.89% to 0.79% since the start of this week, as investors prepared for a wave of fiscal stimulus that would flow from a Biden White House. The decline in US Treasury yields has stabilised for now. We always like to watch the US bond market closely, as it tends to lean towards more sophisticated traders, and can be a good indication of what will come next. If yields start to rise, this could be a sign that the market has shifted its view and is now looking for a victory for President Trump. Thus, Treasury yields are on our radar when the markets open later today.
Beware a surge of volatility ahead
Gold and other safe havens are down slightly today, however, we can imagine a scenario where safe havens rise, which could happen if there is a result that is too close call, which triggers a war of words between President Trump and Joe Biden, which translates to clashes on the streets between their rival supporters. At the time of writing, President Trump is speaking, and he is holding no punches. So far, he has called the election a “major fraud on our nation” after Joe Biden claimed victory earlier this morning. President Trump is calling for vigilance as the rest of the votes are counted, as he fears that his “victory” could be snatched by the Democrats. The dollar has risen on the back of his speech, but there has been no meaningful shift in financial markets, possibly because Trump’s reaction was so predictable, he doesn’t like losing so of course he will call the vote fraudulent to try and save face if he does indeed lose once all of the votes have been counted. At this stage, the market is not taking declarations from Trump or Biden seriously.
It could take days before we know who has won, legitimate votes are still being counted, so both candidates will have to play the long game. This is not a normal election, as candidates do not normally make a speech until the official result is clear. We could be in for a long few days with elevated levels of rhetoric from both sides. Below we envisage a few ways that the markets could digest the election news today:
· The FTSE 100 is approx. 0.6% at the open as the market digests the uncertainty around the US election. Results for M&S were mixed, the retailer had its first half year loss for the first time in 94 years as clothing and home sales slumped, however there was some extremely good news in the food sector and in its profitable tie up with Ocado. Added to that, online sales surged, which could protect M&S during the important Christmas season. So far, M&S has protected the FTSE 100 from the US election uncertainty, as other European indices have fallen more than 1% so far.
· US futures are pointing to a lower open to the tune of approx. 0.5%, we expect volatility to pick up today as key states release their election results.
· Gold is declining as a potential win for Donald Trump could mean less fiscal stimulus and a smaller money supply. However, uncertainty over the result could reverse the move in gold and it could start to rise if markets start to panic in the coming days.
· It is hard to see how stocks can do well in an environment of uncertainty about the outcome of the election, thus we could see this week’s gains start to unravel on Wednesday.
· Uncertainty could be negative for markets in the coming days, volatility could rise along with safe havens.
· Thus, the recovery in global stock markets this week could pause as the US election results trickle through.
· The results from Pennsylvania, New Hampshire and Georgia, the latter of which won’t be declared until later today as counting for the night has been halted, will be crucial. These are the results to watch.
At this stage, it is hard to know how long it will take for a result to be confirmed. Right now, even though we have seen some declines in risky assets, the market is not positioned for a protracted period of uncertainty and a contested result. If that happens then we would expect a sharp reassessment of risky assets, volatility to rise and stocks to fall. There could also be more upside for the dollar and the yen.
To make matters more complicated for traders, it is also worth watching out for any news about a Covid vaccine, as the news about a potential vaccine at the end of year is gathering pace. News of a covid vaccine could boost financial markets, and it may even eclipse the US election result.