US Election: A pre-postmortem on the prospect of US gridlock US Election: A pre-postmortem on the prospect of US gridlock US Election: A pre-postmortem on the prospect of US gridlock

US Election: A pre-postmortem on the prospect of US gridlock

Macro 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  The final US election tallies await, but are pointing to Biden winning the Presidency, with Trump clearly set to go down fighting. Elsewhere, the last gasp shred of a hope for Democrats in the Senate likely hinges on a miracle in run-off elections in Georgia in January. In the meantime, we look at some key questions for markets in the days and months ahead.

The polls were very wrong nationally and in some spots, but very right in others.
During Election Night, once the majority of results rolled in from Florida and clearly showed that Trump was set to take the state and by a larger margin than he did in 2016, I was bracing for an across the board shocker on high risks for a Trump win. But the grand irony of the night was that Florida – the “ultimate swing state” and the best one at counting and quickly reporting its early and election-night results, proved to be utterly mis-leading as it had one of the most pronounced shifts to Trump of any state in this election. Few would have thought it even conceivable that Florida could double its margin in 2020 in the Republicans’ favour relative to 2016, while Georgia, which went to Trump by 5 points to Trump in 2016, looks to be within 0.5% in 2020.

As the night wore on, the blue shift in many states relative to 2016 did in fact emerge, so the polls were directionally correct in aggregate, if still very wrong in places like Wisconsin and Iowa. But the fact remains that something is desperately wrong – and increasing in degree – with the quality of the polls produced by mainstream polling outfits. The polling error at the national level will in the end prove at the very far end of the supposed margin of error and possibly beyond (Biden winning national popular vote by 3% or so instead of 8% or higher). The chief takeaway for market participants is to maintain a very wide margin of polling errors until the pollsters show signs of getting it more right by changing their methods. As well, balancing the polls against things like enthusiasm for individual candidates’ base and “the narrative game” I mentioned in my piece at the weekend.

The outstanding drama focuses on four states
Things will undoubtedly change rapidly both today and in the coming few days, but the paths to a Biden win from here are many and for Trump very few. The drama focuses chiefly on four states: Nevada, Arizona, Georgia and Pennsylvania (assuming North Carolina is a lost cause for Dems). Arizona is theoretically still in play for Republicans, even if some news outlets have called the state for Biden. If Biden does lose Arizona, he will have to pick up either Georgia or Pennsylvania (which is seen as a certain to fall his way), while even if Pennsylvania hangs around in limbo on legal challenges, if Arizona does go to Biden, he only needs to retain Arizona. 

The Senate window for Democrats almost entirely closed
The Democrats’ path to taking the Senate has just about been eliminated. Of the final four seats up for grabs, Alaska will go Republican, the lead in North Carolina for the Republican candidate looks insurmountable. That leaves two Georgia Senate seats where there will be a run-off in early January. Both of these would have to fall into Democratic hands to get to the 50-50 Senate needed to allow minimal Democratic control (with VP Harris as the deciding vote) Thus, it appears nearly certain we will have political Gridlock at least until the 2022 US mid-term elections that prevents the more generous fiscal stimulus that was seen likely under a Blue Wave outcome. More on that below .

Besides the results-on paper, where to focus from here

The quality and narrative of this pronounced knee-jerk market reaction
The first order of business is framing this incredible market reaction that has materialized despite Trump hotly contesting the results and the prospects for two years of ugly political gridlock. Equities and bonds have gone almost vertical since Election Night.  We discussed this in today’s Saxo Market Call podcast, but the most likely immediate driver of the action could simply be that the market has put on excessive volatility hedges on the election uncertainty, and that the unwinding of these hedges (despite the outcome) means the need to unwind short equity futures and short US t-bond futures contracts. Other less obvious contributions to the enthusiasm are that the avoidance of the Blue Wave scenario means we avoid any corporate tax hikes and possibly much lower inflation risks on the short fall of stimulus. Further down the road, one has to wonder if risk sentiment on the outlook could quickly be tempered or worse after this initial relief trade on the risks to growth on lower stimulus prospects and economic scarring from the Covid-19 crisis. Yes, the Fed will try to do more at the margin, but monetary policy is weak medicine compared to fiscal policy at the zero bound. Much more below on the political gridlock implications.

How long will Trump hold out?
Trump is already taking aggressive action and his communication with his base is that the Democrats are outright stealing the election, which no doubt many of them either believe, or don’t care if it is true or not, they just want Trump to stay in office. Civil unrest and random incidents are an overhanging threat with each passing hour.

But fellow Republicans are likely the eventual key in seeing Trump forced to concede. Many of them have been uncomfortably beholden to Trump via his raucous base, which has prevented them from doing anything save going-with-the-flow while he was president. But if there is no viable credible legal challenge of the election results, they will have to essentially decide whether they are in favour of what amounts to a coup d’ètat against the legally elected Joe Biden and his likely 4-5 million popular vote superiority in the  national vote, or to joining arms in asking Trump to step down. Protests on the streets and ugly confrontations are days away if Trump doesn’t back down and risks will accelerate with every passing day.

Is the Fed the savior no matter what?
Some would argue that with Washington gridlock holding back fiscal stimulus potential for at least the next two years, the Fed can offset the downside risks by going ultra-easy. But what can the Fed do from here besides increasing the pace of QE? Any demand side effect would require the Fed to step outside of its mandate and innovate in ways never intended and be highly politically charged.  The Fed’s backstopping of the system is already nearly total and actually increases the risk of zombification, weak growth and moral hazard from here. More of the will prove increasingly counter-productive in the long run. Rather, fiscal is the only way to more powerfully address the demand side of the economy and offer a path to reflation, even if it brings with its own set of problems.


Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (
- Full disclaimer (
- Full disclaimer (

Business Hills Park – Building 4,
4th Floor, office 401, Dubai Hills Estate, P.O. Box 33641, Dubai, UAE

Contact Saxo

Select region


Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.