Fiscal gridlock continues as election draws closer

Fiscal gridlock continues as election draws closer

Equities 6 minutes to read

Summary:  As the US election draws closer, October market dynamics are being fuelled by uncertainties surrounding the presidential race, fiscal 4 still MIA as congress remains gridlocked and Covid-19 cases on the rise in the Northern hemisphere.


The tug of war over uncertainties surrounding the US fiscal stimulus deal continues. After a buoyant start to the week in Asia on recurrent hopes of a deal being reached, risk assets were offered overnight as risk-off sentiment returned. This as stimulus hopes soured once again alongside mounting uncertainties over the chances of a bipartisan agreement.

Negotiations are ongoing but the two sides remain reluctant to compromise, with House Speaker Nancy Pelosi stating significant disagreements remain, while Republicans continue to look for a smaller package. The closer the election looms, the less likely it is that a deal can be reached prior.

The fiscal gridlock is dominating the day-to-day gyrations in risky assets and generating a great deal of noise on a headline basis, but with the US election in close quarters, many market participants are in wait and see mode. With the polls calling the election wrong in 2016 and the real-world margin of error being close to 6% for some state polls, conviction is low and investors/traders are treading water ahead of the election. The race could be far tighter than the polls are indicating.

The lack of conviction only adding to the headline noise making it relatively difficult to decipher what is truly driving risky assets in the run up to the election November 3 and the significant political and event risk that comes part and parcel. For traders the emphasis remains on staying nimble, maintaining optionality and taking position sizing down.

Turnout is likely to be the swing vote in the US presidential race, given just over half the population actually vote. Where an increasingly split cultural and political landscape sees the “left behind” rust belters and Midwest farmers pitted against the climate vote, anti-Trumpism and progressives in mobilising turnout.

With respect to turnout, a key contributing factor could come from younger voters. In the midterms, young people voted overwhelmingly in support of Democratic House candidates. The youth vote provides a crucial swing factor for a Biden victory, amid a concentrated effort by social media networks to re-energise younger voters, where green policy and racial equity are huge drivers for this cohort. This as Facebook, Instagram, Snapchat, and Spotify have all initiated their own voter registration efforts in a bid to drive turnout, particularly among younger voters. Although Biden’s youth appeal may be less than other democratic candidates, Trump’s disdain for climate change mobilises this voting cohort who demand action on climate policy, leaving them motivated to oust Trump.

However, unless these dynamics can drive a Democratic landslide on election night, the probability of a contested outcome remains high. The problem being, Democrats are far more likely to use mail-in voting. Certain battleground states exclude election officials from beginning to process mail-in votes until election day, therefore Republicans votes are likely to be counted first, leading to a potential election night “red mirage” in which Trump appears victorious before the mail-in ballots are processed.

The ability to seize upon that lead and sow chaos and confusion, with accusations of fraud surrounding the mail in ballots could then see the outcome contested. Distrust in the legitimacy of the result has already been roused. That distrust, alongside the societal polarisation which has been supersized by the impacts of COVID-19, sees division ripe for exploit, in many ways primed for undermining public confidence in the electoral process.

These risks support the notion of choppy, range bound markets until the presidential election is out of the way, as focus shifts toward the probabilities of a contested outcome, the home stretches in battleground states and the margin of error in polling.

Equities are likely to rally after the election, regardless of who wins, as long as the outcome is not contested – the unwind of those corresponding hedges and reduction in uncertainty alone will see the market trade higher in the event of a clean election outcome.

Conversely, if we see a contested election come to fruition markets will not be happy. Taking precedent from the 2000 US Presidential election, which was unresolved until early December when the Supreme Court ordered a stop to the Florida recount following a month long legal dispute. This year’s election could come with an even greater legal challenge should the results be a close call. In 2000, the S&P 500 dropped 9% before George W Bush emerged as the victor in early December.

Large hedges in the form of put options are in play through to December 2020 and if dealers looking to hedge, short futures on any post-election jitters, this could be a catalyst for more broad based weakness. As we have seen before, most recently in August 2020, dealer hedging has the capacity to exacerbate directional market moves.

However, taking a big picture view, the trajectory of both fiscal and monetary policy, which remains supportive, will outweigh the election result. Alongside the economic recovery path and the prospects of a vaccine/virus control, as several interim vaccine trial results are due to be released before year-end. Meanwhile there is some ground to cross with respect to the virus, COVID-19 cases are most significantly on the rise in Europe once again which will hinder an economic recovery that is already slowing.

Quarterly Outlook

01 /

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

The information on or via the website is provided to you by Saxo Bank (Switzerland) Ltd. (“Saxo Bank”) for educational and information purposes only. The information should not be construed as an offer or recommendation to enter into any transaction or any particular service, nor should the contents be construed as advice of any other kind, for example of a tax or legal nature.

All trading carries risk. Loses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money.

Saxo Bank does not guarantee the accuracy, completeness, or usefulness of any information provided and shall not be responsible for any errors or omissions or for any losses or damages resulting from the use of such information.

The content of this website represents marketing material and is not the result of financial analysis or research. It has therefore has not been prepared in accordance with directives designed to promote the independence of financial/investment research and is not subject to any prohibition on dealing ahead of the dissemination of financial/investment research.

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.