No blue wave, no prob but for how long? No blue wave, no prob but for how long? No blue wave, no prob but for how long?

No blue wave, no prob but for how long?

Equities 8 minutes to read

Summary:  Bidens wins in Wisconsin and Michigan now mean he has a clear path to winning the Electoral College and is closing in on victory. Meanwhile Trump is launching a legal assault across several battleground states. Markets have taken this in their stride and the rotation trade overnight saw powerful moves in technology stocks that has continued through to the Asia session.

Biden’s wins in Wisconsin and Michigan now mean he has a clear path to winning the Electoral College and is closing in on victory. Meanwhile Trump is launching a legal assault across several battleground states. Markets have taken this in their stride and the rotation trade overnight saw powerful moves in technology stocks that has continued through to the Asia session.

Deflation Rotation

Overnight the curve flattened and growth stocks stormed value as the “blue wave” scenario repriced and investors rotated away from the reflation trade toward the “lower for longer” beneficiaries (tech/growth). Gridlock on stimulus and the Fed now viewed as back in play (a poor substitute for a large stimulus package) driving the deflation rotation.

Diminished prospects of a large stimulus package under a divided government, weighing on yields, whilst long-duration assets that benefit from “lower for longer” were back in vogue. 

In addition, the reduced risk of monopoly crackdown/anti-trust scrutiny and tax increases under a blue wave scenario contributing to the gains. The combination of Senate blocking any substantial tax hikes meaning unchanged tax policy and no risk of a progressive left agenda supporting sentiment.

Legislative Gridlock

Republicans look set to retain a small Senate majority; moreover, they sliced into the Democrats’ advantage in the House of Representatives. With Republicans still bossing the Senate, the prospects of a deal on a large stimulus package are significantly reduced. The $2trn plus that was on the cards under the blue wave could be as small as $500bn with an obstructionist Senate.

Whether this will eventually weigh on risk assets remains to be seen, the overnight gains have been backed up in the Asia trade. Although for Asian assets, with the regions better management of the pandemic and ongoing reopening’s a divergent path is becoming apparent. With the uncertainty of the election removed, once a clean result is confirmed, with the aforementioned factors in play combined to lift investor sentiment, the catalyst for a move higher toward year-end should be in play.

US futures have advanced throughout the day’s trade so for now markets seem to be ignoring this. The narrative appears to be that with Biden + Gridlock a smaller deal will eventually be reached, yields will not push higher as they would have with a larger stimulus package, the Fed will remain in play and rates will remain lower for longer, more QE and liquidity will be incoming and risk assets will be off to the races. Plus no tax hikes or Trump shock factor – Biden is already a bore and hasn’t even taken office yet, markets like that certainty.

Indeed historically, the combination of a divided government has previously been the most positive outcome for the S&P 500. Although the sampling is limited and throughout those periods the economy was not grappling with a pandemic. The COVID-hit US economy is in need of more than a skinny stimulus deal and an obstructionist senate will not be good for growth, confidence or corporate profits.

The stimulus gap and fast approaching benefit cliff with all pandemic related UI programs (PUA, PEUC, etc) set to expire on December 31st presents a concerning dynamic for the US economy. The impasse will be negative for consumption/investment in 4Q20 and well into 1Q21 dependant on the senate race, undermining the 3Q rebound. Overnight, the ADP October jobs report missed estimates by a wide margin, the recovery momentum will wain further as the stimulus gap weighs.

And then there is COVID-19, just as the election has drawn to a close the US set a  fresh record for daily infections. Texas reported the most daily infections since August and New Jersey hit a fresh 5 month high in cases also.

For now, equities are ignoring both COVID and the stimulus impasse, but the options market is not. A look at S&P 500 Dec 3100 puts sees a ~1/5 chance of pay off. 

However post any upset, focus then shifts to the Fed. Do we have to rebuy the put? Perhaps, but we can be certain the Fed will step in if market dynamics turn ugly again.

In fact the diminished odds of an aggressively expansionary fiscal package that Powell and other Fed officials have long pleaded for could see the Fed making policy changes as soon as December, including purchases of longer dated maturities etc.

An expansion of monetary policy measures will be no substitute for a decent fiscal stimulus package. However, the Fed may be left with few options if lawmakers cannot put their differences aside. This is certainly not the best outcome for the real economy, but as we know risk assets love liquidity.

Hence the deflation rotation – the low yield, long duration, stay-at-home trades are back! Reflation trades are likely on pause until there is an update on a vaccine and recovery outperformers may have to wait until we have more clarity on the return to normal.

Contested Result?

Trump continues to sow seeds of chaos and spread distrust in both the Electoral and vote counting process, setting the scene for his loyal base to believe the election victory has been illegitimately claimed by the Biden camp.

This is another factor that could see markets remain on edge, particularly if trump’s diversionist tactics are able to stir up any civil unrest amongst his base. Already a gaggle Trump supporters in Detroit have broken past police and entered a ballot counting center, chanting “Stop the count!”. Against a backdrop of COVID-19 resurgence mounting civil unrest would not be a recipe for restoring business and consumer confidence. Particularly if the next round of government aid is lagging.

However, perhaps markets aren’t reacting yet because it doesn’t seem like Trump has yet  garnered full support for his contest.


The Saxo 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 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 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 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 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 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 (

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region


Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.