Election Uncertainties Dominate
Summary: Most Asian stocks have broadly traded higher in thinner liquidity, China markets closed for holiday, with risk sentiment rebounding in tandem with Wall Streets strong lead
Japan, South Korea and Hong Kong indices trade modestly higher, whilst E-minis and Aussie stocks are range bound, oscillating between gains and losses on the session. Reports a House panel will propose an antitrust overhaul and breakup of tech megacaps weighing on Nasdaq/S&P 500 futures.
President Trump’s departure from hospital, along with optimistic rhetoric from lawmakers on the prospects of securing a fiscal deal in coming weeks has continued to support sentiment.
In addition, fresh polling data cementing Biden’s widening lead has seen risk assets price out some of the uncertainty surrounding a contested election and protracted legal battle, as the probability of a clean sweep for the Dems grows. In this instance the increased probability of a large fiscal spend outweighing the negative impact of higher taxes. The increased fiscal spend and accompanying reflationary pulse boosting US economic growth also being broadly positive for risk assets globally. Early voting statistics show not only a surge voting supporting expectations of a record turnout, but also that Democrats have a significant lead in returned ballots so far. This looks like the trend we saw in the 2018 mid-terms has been continued, which works in favour of the Democrats. Particularly with the mid-terms seeing younger voters turnout increasing, voting overwhelmingly support House Democrats as key issues like the climate and racial equity resonate with strongly with this voting demographic.
Although with Trump returning to the White House and adamant about resuming the campaign trail, we are reminded that the next 4 weeks may still bring fresh uncertainties surrounding the odds of a contested outcome. With the added possibility that the race may tighten again. Volatility and range bound markets will likely be a continuing feature of risk assets pricing a rolling reassessment of election uncertainties as the final dash to November 3 draws closer. Until there is clarity on the eventual policy path, it is likely the election cycle keeps risk assets in limbo.
Another consideration, come November 3 if a clear winner emerges and the probabilities surrounding a messy, drawn out contested result are priced out, those corresponding hedges will be unwound quickly. This dynamic alone could easily see the market trade higher in the event of a blue sweep. This alongside the sector/industry specific beneficiaries which include - infrastructure, renewables, education, semiconductors and gun stocks (sales increase frontrunning regulatory concerns). Alongside the benefits for Asian assets that comes with a Biden administration taking a less tough stance on China.
In summary, the short-term outlook is very much dominated by the election and corresponding uncertainties. However, aside from the uncertainties that go hand in hand with a contested election outcome and potential tail risks that emerge in the form of the social unrest that may eventuate if some believe the victory has been stolen, the election outcome (once known) may be less consequential than investors currently believe. The path of Fed policy and the COVID recovery trajectory, alongside the outlook for inflation, will likely be more important in the medium term for risk asset pricing. Although clearly the probabilities surrounding a clean sweep for the Democrats controlling both the House and Senate play into these factors.