Markets wary as political deadlock sets in
The polls got it wrong. Wall Street hoped for election certainty and what they will end up getting over the next couple days is recounts and lawsuits. This process will be dragged out as many states have different rules for mail-in ballots, audits, and recounts. The courts will be busy, and a Republican lawsuit in Pennsylvania could determine the election if the courts agree to throw out corrected ballots.
The race to 270 will be determined by a handful of states, with the focus falling heavily on Pennsylvania, Michigan, and Wisconsin. Late last night when it was clear we would not have a winner, President Trump claimed victory and said he will ask the Supreme Court to stop all vote counting. Market expectations are still for every vote casted before the deadline will count. The betting odds have flipped a couple times with some expecting Biden to have a slight edge.
The Senate will likely stay red (that could change, but it is leaning heavily that way) and the Democrats House majority lead will shrink which means we won’t see tax hikes, tougher regulation, and massive stimulus spending. The Nasdaq will outperform, and the great cyclical rotation won’t happen anytime soon. Regardless of what happens with the presidential race over the next few days, financial markets are pricing a much more accommodative Fed and that should be bullish for US stocks.
The dollar roared back amid presidential election uncertainty. The dollar became the go-to trade as Treasury yields collapsed on strong safe-haven buying as markets braced for a contested election. Emerging market FX initially got punished once it became apparent that President Trump fared much better. The Mexican peso, Turkish lira, and Chinese yuan declined to the greenback and will likely struggle for direction until the election outcome is clear.
The dollar will weaken in 2021 as a split Congress will force the Fed’s hand to do more in the coming months.
Crude prices are in for a choppy period over the next few weeks. Election Day delivered a strong dollar that did not phase oil prices after the API reports showed a massive decline of 8 million barrels. In the US, the coronavirus testing positivity rate trend suggests, lockdowns are not far away and that will keep oil prices under pressure.
WTI crude’s correlation to US equities remains high and until clarity emerges with the presidential and Senate races, sideways price action should persist. If we see a Biden administration, it seems clean energy initiatives will be met with strong Senate opposition. A Trump re-election will keep expectations high that US production will only rise.
Gold prices did not get a ‘blue wave’ that was supposed to reignite the longer-term bullish trend. The path higher is very much still there, but a strong dollar will continue to be a nuisance. Contested election risks are high and should provide some short-term support for gold. Gold bulls are disappointed, but should not give up, as a divided Congress will force the Fed to do more for much longer.
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