Election special - weekly report
by Monte Safieddine @Monte_IG
We’ve been here before, polls that show one side enjoying a sizeable lead And while 2020 may have felt like more than a decade, the 2016 surprise is still relatively fresh in the minds of those wondering which party will control which of the three There have been plenty of polls done by countless organizations, but thus far most show a comfortable lead for Democratic candidate Joe Biden, and for the Democratic party to retain control of the House of Representatives by an even healthier majority Furthermore, the percentage drop in the number of undecided voters since 2016 combined with the surge in early voting (more than half of 2016 ’s total) has locked in votes
ahead of time, giving candidates a smaller chance to sway what few undecided voters remain, and if polls are correct would make it harder for Republicans to claw back lost territory and close the gap.
The Senate where Republicans currently enjoy a majority show a handful of the 35 seats up for grabs as too close to call, making it difficult to rule out a 50 50 scenario that’ll require the Vice President to break the tie, meaning under that scenario whichever party controls the White House will also control the Senate.
With any major fundamental event (think US Non Farm Payrolls or a central bank announcement), sizeable moves are the norm Short term risk taking might be limited prior, plenty may opt to stand on the sidelines waiting out the unknowns and re enter once the dust has settled, and fund managers worried over risk parameters getting triggered may reposition accordingly. Those that have built up decent market beating returns in what has been a volatile 2020 may choose to avoid risking denting their records for the year with only two months to go, avoiding what may be a chaotic few days that hopefully won’t extend into longer than that Furthermore, market makers that under normal circumstances would provide liquidity to the market may
choose to withdraw to avoid a trend move opposite and get stuck in an illiquid environment (contracts between market makers and the exchanges where the latter pay the former to provide the market with liquidity can include clauses for market makers to withdraw liquidity in the face of fundamental events, and the US elections would easily fall within that category).
The net result? Levels where orders would normally be resting that would cause prices to face resistance are at far greater risk of breaking, and with little volume resting in the market at price levels would make it far easier to kick prices in one direction or another Daily, weekly, and monthly pivot points would be at risk Lots of noise, trendless volatile moves, and false signals getting triggered come as no surprise. Technicals and sentiment usually hold less relevance in these scenarios, though they have been included in this report with the technical overview ‘ owing to the likelihood that levels historically have been at far greater risk of breaking and triggering smaller stop losses, even if prices eventually reversed and offered a trend move in favor of its technical overview pre event Sentiment analysis may show periods where majority bias outperforms and scenarios where the minority reaps big rewards, but under major fundamental events the results are far less conclusive Should election results be sorted swiftly with a clean, peaceful transition, and plenty will re emerge to position in the financial markets, allowing for moves thereafter to ‘ more easily.
The stage may be set for the potential for increased volatility, though that doesn’t always guarantee that conformist breakout strategies in the current environment will outperform indefinitely and across all asset classes Last time around in 2016 the conclusion shocked the markets with few expecting the results to veer from the polls, and this time around a victory for either camp wouldn’t come as a significant surprise even with the margins widened between the presidential candidates It would also mean that if markets have priced for a ‘Blue Wave’ victory, further momentum in that favor beyond what is already priced in may be met with resistance.
Monetary and Fiscal Policy The contrast between the two political parties isn’t just on what they’ll be spending on, but on the size of any fiscal stimulus package, with Democrats in Congress proposing higher numbers than that of the Republican White House, which in turn is at odds with the Republican Senate that has been pushing for a smaller amount That has meant market expectations of a Blue Wave where the Democratic party controls all three would result in the biggest fiscal stimulus packages A Red Wave would also introduce fiscal stimulus, though expected to be of a smaller size, while mixed control would make it difficult to get any further fiscal stimulus passed, especially if of a larger size On the monetary front, while Trump has made clear his dislike for Federal Reserve ( Chairman Powell, his rhetoric has changed as of late given recent central bank easing and promises A Biden win would likely result in less pressure on the Fed to reduce rates and introduce further easing, and highly unlikely he’d openly advocate for negative rates as the incumbent has But overall, we’re assuming this is a case where policymakers have created a situation they can control, giving them multiple options in dealing with it The coronavirus clearly is one of being forced upon them, narrowing options regardless of who’s at the helm.
Taxes, Regulation, Defense A rise in taxes (on the wealthy and corporations), increased regulation, and a dent in defense spending are common themes for Democrats when compared to Republican policies, and that’s expected to remain the case when considering a Trump vs Biden win Increased taxes and regulation are an obvious dent to company earnings and growth, while long term growth prospects are usually improved with fiscal restraint As for defense spending, even if it drops for the US government under a blue win as well as for its allies if there’s less US (i e Trump) pressure on NATO countries to increase spending, it may not translate into a drop globally given the plethora of conflicts emerging and ongoing, and may increase as some governments get more desperate.
Oil: The energy commodity has had a lot to contend with this year, the pandemic briefly sending its price into negative territory as transportation demand plummeted and
lockdowns went into effect Its managed to recover partially since, but rising coronavirus cases forcing governments into increasing curbs and reinstituting lockdowns has tested it once more A fall in prices due to a shock from a plummet in demand or an oil price war (arranged or otherwise) has hit higher cost producers in the US more so than oil
producing governments, the latter having to contend with budget deficits and obligations on a national level but usually enjoying far lower production costs and capable of
weathering the storm in the short term In the event of an upside shock to price, both Democrats and Republicans tend to rush to bring it back within range fearing the economic consequences of higher energy prices for an economy still heavily reliant on the energy commodity In the event of a price crash, oil companies who are based in the Republican heartland would prefer a Trump win that would result in supporting the sector and aiding in sidestepping environmental concerns, as well as interfering as was the case with and Friends’ A Biden win on the other hand, even if it doesn’t result in the infamous ban on fracking claims, would remove subsidies, could result in more supply out of Iran, and be less likely to interfere in a downward price shock, especially if (as with the oil price war of 2014 16 it results in weakening and pressuring geopolitical rivals.
Oil Companies: Given their reliance on higher oil prices as a perquisite to posting profits and ensuring dividend continuity, the net result for oil companies would be a preference for a Trump win over a Blue Wave, especially if the latter impose curbs that would dent transportation demand further, pass legislation that would be stricter for oil and gas companies, and push for emissions curbs in the automotive sector that would hasten the shift to transportation via alternative energy
Alternative Energy Big incentives await the sector with a Biden win, with the move towards alternative energy gaining pace, while mixed control may result in the status quo.
Indices A contested result would be a bearish case for US indices, but if the results (and any potential transition) go smoothly, would take some uncertainty out of what has been an already uncertain atmosphere Republican policies involve lower taxes, less regulation, and the absence of a minimum wage hike that are likely to positively resonate with big business, and in turn the popular indices representing large US companies While the difference may result in short term noise for the stock market, there are more underlying factors to note Central bank easing has translated into inflationary tendencies for asset prices in the financial market with few alternatives available in the bond market and even less in the real economy, and that combined with the government’s perception of the stock market as a bellwether for the economy will continue to offer a floor on any major price drops.
Tech: It isn’t looking promising under a sweep of either political party, with both sides taking aim at the tech behemoths whose market share will likely continue to grow if the coronavirus is here for the long term and economies are forced into more curbs and restrictions Increased fiscal stimulus from Democrats is expected to be a boon for consumer staples and discretionary purchases (not necessarily for companies who will have to deal with higher minimum wages, rise in taxes and increased distancing requirements), and any increase in curbs from a Blue Wave will only translate into increasing reliance on tech companies to deliver where brick and mortar won’t be able to For tech companies, bigger may not necessarily translate into better when it comes to being in the spotlight of the government Under mixed control the damage is expected to be limiting, while a sweep (red or blue) would make tech titans an easier target.
Trade: It’s no longer a question of a China rising, but how soon it’ll surpass the US in the remaining fields where it lags At this stage, it’s a strategic move for the US to try and contain its growth and ensure the ‘strategic competitor’ doesn’t take the number one spot, with previous Democratic and Republican presidential candidates both working in an indirect way by aiding surrounding neighbors and coordinating with allies, only to simultaneously increase the reliance of the US economy on its supply chains. Both sides of the isle have gotten more confrontational in talk and action against China, but it began with Trump taking a far more direct and unconventional approach, an approach that is expected to subside with a Biden win. An absence of rising tariffs would aid the global trade environment, ease USD illiquidity, take global indices higher, and give emerging market currencies a boost. A Trump win (regardless of who takes the House or Senate) would translate into more confrontation between the two heavyweights, and a further undoing of economic interdependence, yet to translate into losses for US companies reliant on the country both as a manufacturing powerhouse and (for some) providing the
largest consumer base
Banks: Regulatory changes from a Blue Wave would be negative for bank stocks, as would any increase in taxes and/or programs from the Democratic party to address inequality. That would translate into bearish moves, even if expectations are for rates to rise sooner under the blue party Mixed control would prevent any significant
legislation from being passed, and in turn likely keep the current situation unchanged.
Automotive: The domestic auto industry being based in a usually blue state while foreign automakers opening plants in red states meant that automakers usually preferred a Democratic presence in Washington to come to the sector’s aid in the event of a downturn, but not necessarily offer much upside potential The reason? The ‘Big Three’ are already trying to forge alliances to tackle a battery powered future, thanks to funds from primarily SUV sales, meaning any big legislative push for curbing emissions from team blue would hurt that aspect Mixed control of the three is unlikely to result in significant changes, and may in fact offer less uncertainty to the sector.
Gold: While a bigger stimulus package from the Democrats would aid growth prospects in the short term, the US market isn’t a traditional one for purchases of the precious metal. And yet, a massive increase in gold purchases this year has aided in taking its price to record highs. The source however, has primarily been on the ETF front, and as a hedge against purchases in equities given the current state of the bond market that isn’t properly covering expectations of a weakened currency thanks to central bank intervention. Any undoing of that trade however, and the gains witnessed as of late are at risk of being undone, especially if a speculative move in the mid term wouldn’t receive central bank or government aid the way the stock market has been accustomed to it. Low rates for longer periods of time certainly make it an attractive asset to hold onto, and
when it comes to a win for Democrats in the elections a weaker greenback in the short term could take prices higher, with a hike in Fed rates being brought forward undoing any short term gains in the medium term.
Silver: While gold prices suffered at the start of the pandemic during the ‘sell everything’ moment, it was silver that underperformed heavily and briefly took the gold/silver ratio
to a record high in the 126 s. It’s dropped back into the 70 80 ranges since, and the story has generally been one of bigger percentage volatility, reliant on rising gold prices to outperform while underperforming when gold prices retreat (in other words, see gold).
US Dollar: Bigger stimulus plans combined with ongoing central bank easing at low rates for longer usually translates into a weaker currency, and it’s likely a potentially more relaxed trade atmosphere and less pressure on companies to shift operations and funds back to the US would aid global USD illiquidity pressures, and put the greenback into further retreat against the majors, as well as many emerging market currencies. The story may differ for commodity currencies, especially for those with an energy underlying
should oil prices suffer another downside shock on domestic curbs or even a lockdown. However, whatever losses the dollar may suffer in the short to mid term are likely to be eventually undone in the mid to long term, as increased use of the greenback will only increase reliance on it for debt servicing.
Cryptocurrencies: No one (at least privately) embraces competition, especially at the level that involves central banks and money/debt creation No surprise then that there have been plenty from both sides of the isle against the introduction of ‘ cryptocurrencies like Facebook’s Libra that in its initial proposal would have posed a threat to a core government function Trump’s attitude thus far has been more hands off, with a Biden win likely to result in increased regulation PayPal’s embrace has been seen as a positive for
the sphere, but with so many Bitcoin untouched in wallets, its reliance as of late has been more on its use as a store of value instead of previous expectations of its promise as a global medium of exchange Absent any regulation, a weaker greenback would in theory aid cryptocurrencies whose money supply increase is limited compared to central banks as fresh lockdowns emerge Regulatory action, a speculative move (easy given lack of liquidity on the crypto exchanges), or another sell everything moment would be needed to
convince holds to exit en masse.
November 2, 2020- Week ahead: As if the US elections weren’t enough of an item, we’ve got significant fundamental events on the economic calendar. Three central bank announcements with the Reserve Bank of Australia (RBA) expected to reduce its key rate from its current record low 0.25% to 0.1%, and where it could in crease bond purchases on long term maturing debt. Both Bank of England and the US Federal Reserve are on Thursday, the former potentially raising asset purchase s a midst another lockdown and extension in its wage program. As for the latter, its statement following the elections will be closely read with regards to commentary ab out current economic conditions amidst
rising coronavirus cases and the economic outlook, with its Chairman Powell questioned thereafter. The central bank recently ann ounced that its Main Street Lending
Program would issue loans as low as $100,000 and reduce the fees for those loans, the previous minimum amount being $250,000.
And then there’s the data. Weekend PMIs out of China from CFLP showed ongoing expansion in both the manufacturing and services sectors, and we’ll get the final
figures out of Markit for the Eurozone and UK, Caixin for China, both Markit and ISM for the US, and Ivey for Canada. Once that’ s out of the way, focus will shift to US
employment, with ADP’s non farm estimate on Wednesday projected to show a 690K increase, the usual Thursday unemployment claims that as of late has been beating
estimates but are still stubbornly high, and the BLS’s Non Farm Payrolls on Friday where the unemployment rate is expected to drop a couple notches. The ongoing surge
in coronavirus cases, any updates on the vaccine front, and earnings are other items to note.