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Did the delayed election give markets breathing space?

Would an emphatic Biden victory on the night have caused greater market upset?


Kirsten Hastings

We live in an era where instant gratification takes too long. So, having to wait several days to find out who won the US election was painful.

And it isn’t quite over yet, with the incumbent still plotting to scupper his rival’s victory through the courts – but it’s fair to say that evidence of widespread tampering would probably have come to light by now.

And while patience is a virtue often lacking in supply, is there an argument to be made that the delayed result was actually a good thing?

Did that extra time mean that markets could better digest the likely outcome, resulting in less movement and fewer big shocks – than, say, if Biden had won Florida on election night?

Or were they already positioned for a Donald departure?

A slight oddity

Mark Harris, chief investment officer at Garraway DFM, told Expert Investor: “It’s hard to prove or disprove anything. But it looks as though market participants were taking out hedges prior to the election and shorting a number of instruments – such as Nasdaq and S&P futures – hence October was a poor month for equity markets.

“The DJIA fell 6.5% last week, the worst pre-election week on record. The decline could be interpreted to mean that some of the contested election risk was already priced into the market.

“It also appears that speculators were buying protection, and it is evident that Vix started to move upwards. The slight oddity in this was that the ‘blue wave’ had caught a bid and the US yield curve started to steepen into the election, as investors grew concerned about the potential for a huge fiscal stimulus package to go through.”

Harris continued: “The real story seems to be that markets/investors are now comfortable with the idea that the Democrats win the election and keep a majority in the house but – and this is a big but – the Republicans keep a marginal control over the senate.

“This, in turn, leaves the Democrats unlikely to get through any of their more extravagant or market unfriendly plans for fiscal stimulus and tax rises respectively.

“Equally, this pushes the onus onto the Fed helping more – lower for longer rates, etc. Markets like these thoughts. So, we’ve seen investors unwind hedges, the second largest equity gains post-election I believe, and the yield curve started to flatten once again.

“It appears that we have removed the near-term potential for more extreme outcomes, albeit the votes have yet to be fully counted.

“So, the thought that the worst of some of the news had already been discounted and investors have now adjusted in true–but I think this has, for the main part, happened in two days–but once we have confirmation; if it is outlined as above, then the trend will likely continue,” Harris added.

Covid trumps politics

Fraser Lundie, head of credit, at the international business of Federated Hermes, added: “The credit market is expressing apathy toward risks related to recounts or contests. Absent a firm headline, speculation alone does not seem negative enough to dent sentiment.

“This may prove to be correct – after all, very few state-wide recounts ever result in a change and in those rare occasions, the margin of victory for the candidate whose win was renounced was negligible.

“That said, we view this passivity and the market moves as being somewhat optimistic and we would highlight the risks of a second covid wave in the US being met by more economically unfriendly restrictions by Biden – a possible catalyst to further downgrading of macro and earnings estimates into next year.

“With larger stimulus packages likely to prove more difficult to pass, inflation expectations have rightly come down and this is likely to further support the demand for fixed income.

“However, this demand needs to be deployed with care. Corporate fundamentals have already undergone significant strain weathering the pandemic to date, and lower quality companies now have precious little in the way of room for error, and as such we are focusing our investments on stronger segments of the credit spectrum.”

Favourable outcome

Kunjal Gala, lead global emerging markets portfolio manager at Federated Hermes, added: “After rallying 460bps post elections, emerging markets are taking a breather.

“While the market is awaiting clarity on the election result, there are concerns over the spread of the virus and impact on demand recovery.

“From an emerging market context, a Biden presidency is favourable.

“The market has presumably priced this outcome and fundamentals are in focus with the earnings season.”

Two catalysts

Marco Willner, head of investment strategy within the NN IP multi-asset team, believes that markets have priced out an elevated level of uncertainty since the beginning of November.

“During this period; the Vix, as a general risk gauge, has significantly fallen from above 40 to below 25 points.

“Likewise, the S&P 500 recovered from the October corrections.”

Willner’s team went into the election “with a neutral view, based on high uncertainty, and started to upgrade our outlook in the last week”.

He says the election result was one of “two catalysts for the small market rally”, along with the news from Pfizer and BioNTech that their vaccine has proven to be more than 90% effective.

“We think that the vaccine news is close to the best-case outcome and improves the general outlook for the coming months.”

He adds: “In the coming weeks, we will closely follow the news on the virus front, the final results of the US elections – especially the outstanding elections in Georgia – new developments around the vaccines and the possibility of a fiscal package in the US.”