- Stocks happy with “status quo” on US Senate result
- US Dollar and 10-Yr Bond Yields fall on likely Biden victory
- Trump’s legal challenges won’t amount to much
As an Australian living in the United States – it’s been a crazy year.
Call it a unique time in our history.
Certainly one I won’t forget!
The highly contentious US election of 2020 was just part of the “craziness”… and I’m glad it’s mostly behind us.
I say ‘mostly’ as the count is still underway.
5 states remain undecided.
At the time of writing ~140M US citizens have voted – a new record. That’s about 60% of all eligible voters (which is considered a good turnout in the US).
It turns out there was no so-called “blue wave“… and nor was there a “crimson tide“.
And whilst Biden seems likely to win… this is a nation firmly divided.
Perhaps even more than what it was in 2016.
I say that because Trump received more popular votes in 2020 (almost 69M) than Hilary Clinton did in 2016 (nb: Biden is around 72M)
With a population of more than 300M… that’s a pretty evenly split vote.
And I personally think that’s the message the Democrats will take from this .. a country divided.
Where Do Markets Go From Here?
Whilst Biden has several pathways to achieve the magic number of 270 (he’s on 264 at the time of writing) – markets have priced in a Biden Presidential victory.
But as I say – it won’t be the “blue wave” most poll predicted.
My view – pollsters need to rethink their approach. They’re obviously
But let’s get back to markets (and my beat)…
Today was the largest rally after an election we’ve seen… mostly led by tech stocks
S&P 500 – Nov 04 2020
Last week’s selling was erased… as stocks like Amazon and Google surged over 6%.
From mine – what’s noteworthy is the plunging VIX.
Last week it hit ~40 as the market turned lower… indicating investors were willing to pay a lot for protection.
Today it was down a massive 17%
What’s that mean?
In short, that is a lot of protection unwinding.
Put another way, options market makers are unwinding the index and stock short sales that they had established in order to satisfy market demand for puts.
The net result – it boosts stock prices.
And no more did we see this in tech where investors were willing to buy a lot of protection in the event of a blue wave.
Given the rapid rise in tech during the pandemic – investors protected themselves for a sharp move lower post the election.
Status Quo in the Senate…
There were also other outcomes from today which may have eased some of the market’s election concerns.
For example, whilst Biden is likely to win the Presidency – markets see the Republicans holding the Senate
Wall Street was not unhappy with that outcome – as it will likely mean such things as:
- removing the prospect of tax increases over the next few years;
- removing the possibility of further corporate regulations;
- kills the chance of any Green New Deal; and
- it sets back the Democrats potential consideration to pack the Supreme Court etc
From mine, maintaining the status quo with taxes and regulations will be considered a good outcome. For example:
- big tech – less likely to be faced with increased regulation;
- health-care – won’t be hit with forced lower prices; and
- energy – may not be crushed with new restrictions on fossil fuels etc.
As a final note – Mitch McConnell (Senate Majority Leader) said today that he would like to work with the Democrats on a stimulus deal before the New Year.
Whilst it might not be the $2.2+ Trillion the Democrats were seeking – McConnell wants to get money to individuals and businesses urgently.
Markets will welcome any development on the stimulus.
And that’s like to send the US dollar lower…
Watching the US Dollar and 10-Yr Bonds
Two key charts to watch over the coming weeks and months will be reaction we find with:
- the US dollar index; and
- US 10-year yields
First the US dollar index:
US Dollar Index – Nov 04 2020
The dollar sold off sharply post the election result (a boost for risk assets)
However, it remains range bound the past couple of months until we get more news of a stimulus.
For example, if your view is we will see the Fed continue to use its printing press to fund even bigger fiscal deficits – then this will likely pressure the dollar.
Of course the Fed won’t mind a weaker dollar as it’s inflationary. For example, inflating away the value of dollars is perhaps the only way to reduce record debt.
I remain wary on the US dollar (in light of the headwinds) — and think another sharp leg lower is not far away.
US 10-Year Yield Trades Lower
The other move we saw post the election (interim) result was the move lower in 10-year bond yields.
US 10-Year Yield – Nov 04 2020
This chart doesn’t show the near-term fall… however the long-term (monthly) trend is important.
These yields are near all-time lows which tells me the bond market is not confident on near-term growth and/or the inflation outlook.
Note – lower yields are needed to fund the record levels of debt.
However, let’s look up close at the daily chart (post the election)
US 10-Year Yield Daily Moves – Nov 04 2020
Here we see the dramatic plunge in yields…
These yields touched 95 basis points recently – which has also resistance in June.
Today they trade back below 80 bps – and I suspect we have seen “peak yields” in the near-term.
Now don’t be surprised to see hear Fed Chair Jay Powell tomorrow talk down yields (and rates).
In summary – if bond yields are to trade lower – this is dollar bearish and bullish for precious metals and commodities (copper, oil etc)
However, it will be bearish for banks as they watch the yield spread narrow.
Note – banks did not participate in the election rally today – with stocks like Bank of America and JP Morgan losing around 3%.
Whilst Trump will legally challenge the results in the courts (perhaps delaying the official outcome) – it’s a waste of time.
It’s very likely Biden will win the Presidency…
His path to victory is simple.. with only one more state required of the 6 not yet declared
The easiest path is winning PA (where Biden looks strong due to the strength of mail-in votes).
But from the market’s perspective – with a Republican Senate – Biden’s campaign for such things as tax increases, greater regulations, packing the courts, a green new deal etc – will be unlikely to materialize.
Status quo is an outcome which sits well with the market… even if it means perhaps $1T less in fiscal stimulus early next year.
Regards,
Adrian Tout
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