The ’Blue Wave’ became the ’Blue Mirage’ with choppy equities

According to Bloomberg US election page this year’s election is much closer than the prevailing narrative in mainstream portraited leading into the election day. It has been some confusing 24 hours in markets, but we will go through various phases and come with our best guesses on what to expect in equities.

The four phases and the long waiting

The last 24 hours can be catagorised into four phases with choppy markets digesting every turn in numbers and changes to the overall narrative. Equity markets are choppy with observed price swings intraday across many markets at around 5%.

Phase 1: The ‘Blue Wave’

Equity markets were rallying on election day yesterday with the broader US equity market clearly outperforming technology stocks. The USD was weaker, VIX futures were lower, Chinese technology stocks were higher and US government bonds were lower suggesting a clear ‘Blue Wave’ scenario resulting in massive US fiscal stimulus coming.

Phase 2: The ‘Blue Mirage’

As votes were counted during the night it quickly became obvious that the ‘Blue Wave’ was nothing more than a ‘Blue Mirage’ reversing crowded trades across markets. The USD was strengthening again, and the broader US equity market was falling while US technology stocks were gaining again.

Phase 3: The contested scenario

Not long after Biden’s late night speech saying he felt comfortable winning the election, US president Trump took the stage declaring himself as a winner and basically said he would fight in the courts increasing the risk of a contested election with neither side backing down. Risk-off was immediately triggered across the board as this scenario could create uncertainty for the rest of the year.

Phase 4: Arizona flip and ‘status quo’ bets

The fourth phase is the most confusing. First Arizona was called for Biden leading to VIX futures coming off discounting lower probability of a contested election and a Biden win, but then equities generally rallied making the interpretations more confusing. But within the last hour the narrative building in markets seems to be that we are increasingly getting ‘status quo’ which is Republicans holding the senate and Trump getting reelected. This is most purely expressed in US technology stocks because Trump’s tax policy on income from intangibles and corporate tax rate is most favourable to US technology stocks. But the price action is still confusing with VIX future declining indicating lower probability for a contested election.