Nov 4 (Reuters) - U.S. stocks opened higher in the wake of some wild swings in the overnight session, while longer dated Treasury yields buckled on Wednesday as results from the U.S. presidential election proved far closer than expected and investors geared up for extended uncertainty.
Early in the count, betting markets flipped from having for months assumed a win for Democrat challenger Joe Biden to suddenly price a high probability President Donald Trump would keep the White House. But as votes continue to stream in they have jumped back sharply in favor of Biden in recent hours and many investors still think it’s still too close to call.
There are many doubts about whether the Democrats can now take the Senate from Republicans, undermining pre-election betting that a Democratic ‘clean sweep’ of the Presidency and Congress was likely - complicating the likely passage of a big fiscal stimulus package after the result and other Democrat policy initiatives. Counting to get a final result could take days at least.
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COMMENTS JOSEPH LITTLE, GLOBAL CHIEF STRATEGIST, HSBC GLOBAL ASSET MANAGEMENT, LONDON
“For now, we remain constructive on the U.S. economic outlook, on further fiscal support and loose monetary conditions.
“Electoral uncertainty may cause some near-term market volatility, but we remain overweight on U.S. equities, and stay strategically underweight U.S. Treasuries, given low prospective returns and bond yields.
“Fiscal stimulus measures are still expected in 2021 which can still push yields higher (prices lower), even if Fed policy action reduces this risk. Recent market performance also challenges the assumption that government bonds can act as a reliable portfolio diversifier.”
JONATHAN DAVIES, HEAD OF CURRENCY STRATEGY, UBS ASSET MANAGEMENT “The moves have not been that large. One interpretation of this might be to say that the market was always a little bit skeptical about those polls that were suggesting that Biden had such a strong chance of winning. I think he was sort of the 90% favourite according to some analytics of data – maybe the market was not so convinced about that.
“I would suggest that the recent market moves indicate that maybe the market was not relying so much on those polls.” EDWARD MOYA, SENIOR MARKET ANALYST, OANDA, NEW YORK
“It’s so difficult to gauge what’s being priced in, but the one thing that you can’t ignore is that move in Treasuries. We saw solid selling, the steepening of the curve, and the reflation trade… I think so many people were expecting that 10-year yield to be at 1 percent, and now I think you’re probably going to see us be lower for longer…there is still a whirlwind of uncertainty and I think you’re probably going to see safe haven buying because of those concerns and that’s going to keep yields under pressure and ultimately people are going to want to still hold U.S. stocks.
“Markets are repositioning because everyone was kind of getting ready for those Democratic policy trades and now its like ok, we’re not going to buy Caterpillar and Tesla because we’re going to have all these clean energy initiatives and now its like tech is looking pretty good, no tax hikes, regulation’s not going to be as bad and I think you’re probably going to see financials be pretty attractive here, so you’re going to see a lot of moving around of positioning. But we’re not getting that cyclical rotation which I think was really what was needed to accelerate that move to record high territory for equities.
“What’s tough is you can’t even say for sure what the results are going to be, but a split congress is likely. The Contested election outcome and this going to the courts, that is what I think everyone does not want and it is a risk if you don’t have that certainty then you’re going to eventually see that risk aversion will persist like we saw in 2000 and that could be short term negative for stocks.”
BRIAN JACOBSEN, SENIOR INVESTMENT STRATEGIST, MULTI-ASSET SOLUTIONS, WELLS FARGO ASSET MANAGEMENT, MENOMONEE FALLS, WISCONSIN “While we still don’t have results full results, it looks like instead of a red wave or blue wave scenario — with all respect to Prince — we have more of a purple rain scenario with gridlock being the most likely outcome.
“That could mean less likelihood of fiscal stimulus, but it could also mean a lower likelihood of big changes to tax policy or regulatory policies. Regardless, we believe the economy is more important than the election to the markets.”
NIKESH PATEL, HEAD OF INVESTMENT STRATEGY, KEMPEN CAPITAL MANAGEMENT, LONDON:
“From our perspective, we have gone into this situation pretty finely balanced. We were reminded very much of four years ago when we had a clear view on what was likely to happen and we were wrong. So, going into this one we had a very small wedge towards a Biden victory but we were very much aware that Trump could surprise again and therefore we haven’t taken any large positions.
“You normally you find the VIX index drops quite quickly after an election after there’s a clear view, one way or the other, of what the outcome is going to be. It doesn’t have to be the right outcome but as long as the outcome is known, volatility tends to drop. The race is far tighter than anyone who was in the blue wave category was expecting.
“If there was a stomping victory for Biden and a Democratic Senate, big tech would rightly have expected greater regulation and an increase in taxes. The fact that some Republicans like Lindsey Graham and others have retained their seats mean the odds of a Democrat Senate have dropped dramatically. So, the odds of a really bad situation from a big tech perspective have diminished and that has then led to their stocks performing better.”
ANTOINE BOUVET, SENIOR RATES STRATEGIST, ING, LONDON
“The thinking here is that regardless who wins the presidential race, congress will remain divided. This justifies a reversal of the ‘reflation trade’ that was priced in the run up to vote.
A Biden win would probably be greeted with better risk sentiment (for instance with a weaker dollar and higher stocks) but this is secondary for rates. What rates care about mostly is the odds of substantial fiscal stimulus. With Democrats failing to retake the senate, and losing seats in the house, this would increasingly looking like a pipe dream. At most can we expect a fiscal package in the new year, but the long term picture is as muddy as ever.
The upshot for rates is that we don’t have the escape velocity to break above the recent range. A vaccine would change that but for now, the election is not providing much upside impetus for rates, save perhaps for the lower chances of trade war if Biden wins the presidency.”
DANIEL MORRIS, CHIEF MARKET STRATEGIST AT BNP PARIBAS ASSET MANAGEMENT IN LONDON
“The one thing we can say for sure is that it’s not Blue Wave and even if you get a scenario where Biden winds and the Democrats do get control of the senate, it would be a minimal (control), which is, effectively, similarly for the Republicans, it’s non-control, it’s such a slim majority. “Neither party is going to be able to pass much significant legislation. We’re probably looking at gridlock, irrespective of who actually is president.”
“You’re seeing to some degree a rotation that reverses the rotation you’ve had over the last couple of weeks, that will get us back to where we were again before the first wave. What we may realize is that maybe not a lot has changed. From the gridlock perspective, very little has changed, because essentially you’ve had gridlock over the last two years.
“What it takes us back to is: what are the fundamentals? What this tells us is that, under gridlock, Washington and the politics don’t matter that much anymore.”
TOBY NANGLE, GLOBAL HEAD OF ASSET ALLOCATION, COLUMBIA THREADNEEDLE, LONDON
“Vote tallies in key Senate races are consistent with no overall Democrat control even in the event that Biden wins the Presidency. As such the abolition of the filibuster, feared by tech investors wary of the prospect of regulatory hardening looks less likely. The prospect of a very substantial fiscal package that would boost nominal GDP – raising demand for goods and services, dampening deflationary fears and pushing bond yields higher – looks lower with a split Congress. As such, initial market reactions that have seen bond yields fall and quality growth equities retaining their leadership look reasonable.”
STEFAN KREUZKAMP, CHIEF INVESTMENT OFFICER, DWS GROUP
“A continuation of the status quo has become much more likely. So, in particular, no withdrawal of Trump’s tax reform. But it would also mean that timely adoption of a comprehensive stimulus package has become less likely. If Trump remains in office, smouldering conflicts, for example with China, are likely to become more acute.
“It is still far too early for a final assessment, and we would not put too much emphasis on early market reactions. Investors will probably not get a clear picture of the new administration’s priorities, what it wants to do and is able to do, until the first half of 2021.”
DIDIER BOROWSKI, HEAD OF GLOBAL VIEWS AT AMUNDI, LONDON
“In a divided-power scenario or a contested outcome, the rising volatility should push appetite for the US dollar higher in the short term, while expectations for higher deficit should recede sharply. Investors’ focus should shift back to the Covid-19 situation in Europe and its impact on growth. On EM the dollar trend is key: a weaker dollar is supportive for EM assets. On China, the tough rhetoric will likely remain, whatever the scenario.
“The great rotation towards the Biden trade - including the value cyclical equity rotation and the steepening of the US curve - is now on hold. Overall we remain cautious and balanced.”
DAVID ZAHN, HEAD OF EUROPEAN FIXED INCOME, FRANKLIN TEMPLETON, LONDON
“As things stand, the senate will probably not go to Democrats and this has repercussions, regardless of who wins, on what fiscal stimulus can be agreed. If the Democrats control the House and the Republicans end up controlling the Senate, it’s quite likely that any big spending programmes will be difficult to go ahead.
“This could go on for several days, creating continued uncertainty, and as we know markets hate uncertainty. We have seen credit sell off as expected and risk free assets such as U.S. Treasures and U.K. Gilts do well as a knee-jerk reaction from investors who are looking to buy safe assets. Our European funds are positioned long duration with significant positions in U.K. Gilts, German Bunds and French Oats. This should benefit portfolios in times of volatility.”
VALENTIJN VAN NIEUWENHUIJZEN, CIO, NN INVESTMENT PARTNERS, THE HAGUE
“There is clearly a tighter race than expected on the presidential level, and also in congress. One of the early takes is that the Blue Wave is out of the way - that is pretty clear. The potential read through already from that in terms of the fiscal policy outlook - which will be differently shaped - will also be smaller, that will be almost a certainty. In terms of market impact, what seems to be the most significant so far is the rally in U.S. Treasuries. Those two come closely together, because this is one of the few close-to-certainties that we have.”
“The most important driver there is Republicans holding onto the senate, thereby the fiscal package of three trillion will not be coming through and in the composition of the package, it will be less focused on state aid or infrastructure spending and more focused on corporate tax cuts. I don’t expect any comments tonight, but with less fiscal stimulus the Fed will have to remain more dovish for longer and again, weighing on yields.”
RICK LACAILLE, GLOBAL CIO, STATE STREET GLOBAL ADVISERS
“We expect quite a lot of market volatility. However, the core investment conditions that we see for the next 12 months won’t be reversed by this volatility. The monetary and fiscal stimulus that we’ve seen so far to counter the pandemic is yet to work its way fully through the system, and we expect that it will be one of the big influences on investment conditions in the next 12 months.
“From an investment perspective high quality equities and staples are expected to do better. While areas like healthcare may still do well, particularly if Congress is likely to be split and there is a need for a lot of consensus building before more radical policies take root, we should avoid outright bets, for example, on renewables or the oil and gas sector.”
FABIANA FEDELI, GLOBAL HEAD OF FUNDAMENTAL EQUITIES AT ROBECO
“From the point of view of equity markets a divided Congress at this point is the least desirable scenario, independently from which side wins, as this could mean delays in policy execution and in what we believe is a much needed stimulus package in the near term.
“There are two equity trades here: in the short-term, until uncertainty on the outcome (subsides), we can expect investors to turn more defensive and some of those “Blue sweep” trades that we have seen arising since the summer and even more so over the last few days are likely to unravel: EM equities and FX, including China, the renewables theme (on expectation that a Biden administration would favor more environmentally friendly policies), and cyclicals over big tech.”
STEPHANE MONIER, CIO, LOMBARD ODIER, GENEVA
“It’s far too close to call, but right now it is clear that the Democrat landslide suggested by polling is just not materializing. For now, it very much looks that whoever wins the White House, we face a divided Congress.
“This has far-reaching implications for markets, mostly because it means that any kind of pandemic recovery package is still tough to approve. Our portfolios are well balanced to withstand the volatility ahead, and in the very short term we are going to keep some powder dry and reduce our exposure to high-yield credit so that we have a little more cash to deploy once this election is settled.”
DAVID BAILIN, CIO, CITI PRIVATE BANK
“We may be entering a scenario similar to the 2000 election, where the final vote tabulations may be contested and where there may be numerous legal actions at the local, state and Federal levels.
“This may have numerous unforeseen consequences for markets over the coming weeks. Accordingly, volatility is likely to remain high.”
KEVIN THOZET, MEMBER OF THE INVESTMENT COMMITTEE, CARMIGNAC
“A dark blue wave with (Sen. Bernie) Sanders as labor secretary that would have been very painful for markets. The probability of that is now low, so that means we can start to think beyond this short-term movement and over the mid term, there’s some good news behind that - what you will be getting either way will be stimulus.
“The size of the envelope and the focus will vary on who is the future president but either way I see 10-year U.S. Treasuries grinding higher to around 1% either way - a bit higher if Biden wins.”
Compiled by the Global Finance & Markets Breaking News team; Editing by Richard Pullin, Jacqueline Wong, Kim Coghill and Mike Dolan