In just under 22 days US voters will once again go to the polls to select who they want to lead the country over the next 4 years. With the second debate now cancelled, attention will be directed at the 22nd October debate which is still scheduled to take place. The race itself seems to be straying towards a Biden win (68% Biden win, 32.3% Trump. Betfair.com) according major bookmakers. Looking at market reactions, it’s fair to say that the less contentious this election is, the better for stocks. Key states such as Ohio, which the Republicans have never lost if they go on to win the presidency race, are now thought to be falling into the hands of the democrats. One key observation is that I always felt a Biden win may be interpreted as a negative for stocks but with his willingness to unleash much more aggressive stimulus packages than Trump, that’s got be to seen as a positive. Bank stocks are likely to benefit from that extra boost, if it feeds through and benefits the economy - inflation will rise, strengthening the case to raise rates. Banks are big gainers with higher rates. The upcoming earnings season will give us good idea how everyone is holding up during the crisis. As we draw closer to the final events, we take this opportunity to look at the markets which traders will be focusing on over the night of the election itself.
Representing 30 of the largest listed stocks using a price-weighted average, this index will likely see heavy volatility throughout the night as results start to filter through. This market will be open to trade throughout the out of hours session allowing traders to capitalise on market events. As one of the few US equities not to record a brand-new all-time post pandemic outbreak, will we see a clear path to 30,000 after the election? Under Trump markets have been on record rallies due to his more business centric policies, which in turn has created record numbers of jobs but tariffs on China have often unsettled the market. Biden is not a fan of Trumps corporate tax cuts which has been a key driver of US stocks but favours scaling back on Trump’s fierce rhetoric on China. This market is likely to the biggest draw on election night.
Representing 500 large companies in the US, this huge index will likely offer opportunities throughout the evening of the election. Back in August, we saw the index surpass its previous all-time high even in the face of a global pandemic. With the FED pumping in further stimulus via QE as well as affirming low rates for a much longer timescale, stocks have outperformed. Concerns are creeping in that large tech stocks are getting ahead of themselves and fresh fiscal policy may not arrive. Will stocks continue to climb if Trump wins another term? Odds show that Biden is favourite and if this is confirmed on the night the SP 500 is likely to have knee-jerk negative reactions.
The US dollar often acts as a safe haven asset, even if the high-risk event originates from the US. With FX markets trading around the clock, we are likely to see EURUSD, the most traded FX pair, react as events unfold throughout the night. The dollar has seen its fair share of weakness this year but has stabilised in recent times as stimulus talks yield no outcome and the president contracting convid-19. Come the night of the election, a Biden win followed by the Democrats winning the senate would improve chances of stronger stimulus and the patching up of China relations, both US dollar negative events. With such a divisive and contentious election taking place, will investors look to shun the greenback during these turbulent times? We do not know what the result will bring. Will there be discord and riots among the public? Will one side refuse to accept defeat causing prolonged confusion? The risk does seem a lot more than usual and this is what keeps investors away and look further from the US and at other national currencies. A new government or a government retaining its position can also create further risk as confidence is high and the chances of rapid policy change increases. This may cause investors to adopt a wait and see approach, holding off investments.
A key market to watch during this election period is Gold, which is another popular safe-haven for investors. The precious metal has enjoyed a huge rally over the past months due to the global virus pandemic and concerns over US fiscal stimulus response to the crisis. With central banks around the world adopting a more indebted tone and relaxed approach to inflation, gold is often seen as an inflationary hedge due to the asset being priced in dollars. Gold may remain supported due to the uncertainty this election brings, with particular emphasis on any delays which will boost gold. A Biden win may also have a positive effect on Gold prices with his willingness to increase debt higher than current record levels this makes the Dollar more unattractive. With Gold trading around the clock its sure to attract a lot of interest from traders as events of the night unfold.