After saying goodbye to their worst month since March due to the new wave of covid-19, the financial markets have responded this Tuesday with enthusiasm to the elections in the United States, on which the future of their economy depends and in which different polls and indicators suggest that Democrat Joe Biden will win over the current president, Donald Trump.
Wall Street began the day with the same energy as the country’s early voters, and its main indicators shot up as the session progressed, knowing that a winner of the elections will probably not be announced until the evening, but with the expectation that Biden and the Democratic legislators will sweep away a “blue tide.
Near mid-session, New York’s trading floor approached its highs for the day, with the Dow Jones Industrials rising 643 points (2.39%); followed by the selective S&P 500, which gained 2.24%, and the technology-intensive Nasdaq Composite Index, which rose 2.12%, a sharp contrast to the previous week’s massive sales.
With nearly 100 million votes cast in advance, mostly by mail, FiveThirtyEight today predicted Democratic control of the Presidency, Senate and House of Representatives, with a 10% chance of Trump winning, while the “Presidential Predictor,” which looks at the S&P 500, also points to the Democrat.
Nevertheless, Wall Street is aware that the polls failed in 2016, when they predicted the victory of the Democratic candidate Hillary Clinton, and that they will observe the early results in several hinge states such as Florida or North Carolina, which could indicate where the balance is tipped in the congressional race, one of the key elements.
The composition of Congress is important to the market because if the Democrats regain control of the Republican-majority Senate with Trump, the anti-Covid-19 fiscal stimulus package that has been stranded for months could go ahead, blowing more than $3 trillion into the economy and boosting recovery.
“MAYBE THEY SEE SOMETHING THE REST OF US DON’T.”
The former chief economist of the White House Council of Economic Advisors between 2018 and 2019, Casey Mulligan, told Efe that the market “takes information from everywhere” and referred to an old American saying: “Abraham Lincoln learned the results of the Civil War, of the battles, from the stock market, not from his generals. Perhaps they see something that the rest of us don’t.”
Mulligan was more skeptical about the polls and indicators and noted that “there hasn’t been any news about a blue tide in the last day, even in the last week, and the stakes haven’t changed much either,” while he has heard that there is “a lot of money coming into Trump. “We think the market would want a clear winner, that’s for sure,” he added.
BONDS, FOREIGN EXCHANGE AND OIL
Investors are also watching the public debt and 10-year Treasury bond yields, which today shot up to their highest level since early June, to 0.892%, as this market can be influenced by upcoming trade, energy, fiscal and budgetary policy decisions, as well as pandemic relief.
“If the results are close and we wait until the early morning, or beyond, for signals from those states that count more slowly, (performance) movements could be more limited by the possibility of divided government and fiscal (stimulus) blockage,” the expert added.
Kathy Jones, chief strategist for fixed-income securities at the Schwab Center for Financial Research, added that “there could be a modest rise in 10-year Treasury interest rates to the 1% zone following a fiscal stimulus package, but that will likely be limited by low inflation and the policies of the Fed.
On the other hand, the analyst Craig Erlam, from the firm Oanda, said in a note that he expected the foreign exchange markets “to be naturally very volatile during the next two days and although the dollar will take most of the peso, the impact will be felt further away”.
“The role of the dollar as a safe-haven value to the detriment of gold has been seen by all, and particularly this year. It will be interesting to see if that continues that week given that the U.S. will be at the center of the uncertainty,” he added.
As for the oil market, the firm Rystad Energy published an analysis today in which it concludes that, although Biden could “benefit demand in the short term, its criteria for foreign relations could bring more supply to the market,” while Trump, for being a conservative and defender of the sector, would have the most immediate upward effect.
“We see a volatility in prices – low for Biden, high for Trump, but most of all we expect the election to be a milestone, a sigh of relief after which the oil market is redirected towards a broader structural weakness at the macro level and towards the greater probability of a destruction of demand” caused by the second wave of covid, said its analyst Bjornar Tonhaugen.