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U.S Election - Market Outlook
On the night, more uncertainty will most likely lead to lower equities and a general risk off tone until the result is confirmed.
But what next?
Election-aside, there is a lot of uncertainty on the horizon with the new round of lockdowns and restrictions, so the main focus has to be the near-term outlook.
Initially, the Blue Wave is the most risk-positive scenario.
A clear outcome and a huge fiscal push without those miserly Republicans banging on about trivial matters like the fiscal deficit.
A couple of Blue Wave scenarios:
Nordea;
In our view, a Biden win will be associated with a risk-asset rally, a weaker USD with positive spill overs to EM and a slightly steeper yield curve
Goldman Sachs;
Our market views remain broadly procyclical, consistent with our above-consensus global growth forecast. While a blue wave would have mixed implications for broad US equity indices—after all, the Biden program does include a sizeable increase in the corporate income tax rate by up to 7 percentage points—it would likely result in substantially easier US fiscal policy, a reduced risk of renewed trade escalation, and a firmer global growth outlook.
(and breathe...)
These shifts should be clearly positive for cyclical sectors, as well as firms that pay most of their taxes outside the United States. In addition, we would expect a material backup in longer-term sovereign bond yields as well as support for our standing forecasts of higher commodity prices and a weaker US dollar.
Once the initial risk rally subsides, and the rising tide lifts all boats, the questions begin.
What about the Senate majority?
If Democrats win a majority larger than 51 seats, the passing of legislation will be easier, and a larger fiscal bazooka can be launched.
This scenario would most likely see inflation expectations increase, along with the corresponding increase in bond yields (Fed-permitting), and USD weakness.
Worth noting that this may give way to USD strength further down the line if yield hunters decide to use the U.S. as their savings destination of choice.
German Bunds at -0.6% vs U.S. 10 year at 1% plus would be pretty hard to ignore.
More questions...
Who will be Treasury Secretary?
Lael Brainard looks the most 'market-friendly' choice.
Elizabeth Warren is interested, and her appointment would stoke fears of greater Wall Street regulation.
During the primaries she also made her feelings known on fracking...
“On my first day as president, I will sign an executive order that puts a total moratorium on all new fossil fuel leases for drilling offshore and on public lands. And I will ban fracking—everywhere.”
Appointing Warren to such a high-ranking position could easily spook markets, especially if Democrats have a strong senate majority.
Then there's the whole tax situation.
Research by Goldman Sachs highlights the sectors most at risk of tax increases.
@doejistar
Combine the higher taxes with potential anti-trust action, and you can see why analysts are anticipating some rotation into the unloved value stocks.
More on them in a sec.
The next graphic is from Morgan Stanley, and examines the likely fiscal impact of each outcome.
Anything other than a blue wave increases the likelihood of fiscal gridlock, putting us firmly back in the Fed's hands...
If this happens we probably return to the path of least resistance.
A grind higher in tech/growth stocks and riskier assets.
Remember this?
Everything in there still holds true.
A Blue Wave might bring some temporary flows into the so-called value stocks.
But if inflation expectations start to rise (bringing rate hikes forward), many of those firms will start to look less attractive.
Then what?
A firm with limited funds for innovation/investment AND the prospects of higher debt-servicing costs, (and maybe a higher tax burden too)?
Hmmm.
No thanks.
I'd rather back this guy.
