From lockdown and the US presidential election to quantitative easing - what are the impacts on the markets?

  • 5th November 2020

What has happened

Global equity markets rallied on Wednesday led by US stocks, as investors reacted to the growing likelihood of a split Congress and with it a lower risk of tax rises. But there was a very wide disparity between sector performance. Leading the market, Healthcare and Technology sectors rallied on lower perceived risks for healthcare reform and technology regulatory pressure. At the other end of the market, the weakest sectors included Materials, Financials and Industrials as investors recalibrated their expectations of a Democrat ‘blue wave’ which washed out on election night. As hopes faded for a large fiscal stimulus and reflationary impulse, previously growing expectations for a rotation towards the more economically sensitive parts of the equity market came undone. Similarly, inflation expectations fell sharply, with the Fed’s 5y5y measure of medium term inflation expectations on Wednesday now at 1.72% (down -10bps from only the day before). US 10 year government bond yields saw their biggest daily fall since March.

Latest electoral state of play favours Biden, but Senate looks to be the key as a split Congress looks more likely

In the race to become President, Biden is leading Trump after Democrats gained Wisconsin and Michigan yesterday. These were two states that Trump flipped in 2016, which Biden appears now to have flipped back. However, Trump’s campaign filed lawsuits on Wednesday in Pennsylvania, Michigan and Georgia, and Trump’s campaign manager Bill Stepien has cited ‘irregularities in several Wisconsin counties’, suggesting they might seek a recount there. As for the Senate race, Democrat hopes to flip Republican seats have faded, although control of the Senate may still come down to a Georgia special election that will be decided in a run-off on 5 January. With the Republicans looking more likely on balance to keep control of the Senate, it is this outcome which looks to have become the narrative for markets in the immediate aftermath of the election results.

Bank of England increases QE

The Bank of England has this morning announced that it will pump an extra £150bn into the UK economy as it warned the resurgence of Covid-19 could lead to a slower recovery. There was no change to interest rates, left at 0.1%. The bank said that the action was taken in response to ‘signs that consumer spending has softened across a range of high-frequency indicators, while investment intentions have remained weak’. While today’s action is helpful, ultimately with borrowing costs for businesses and households at already historically low levels it is fiscal policy and the government’s recent extension of its furlough scheme which is likely to be more important economically in the very near-term.

What does Brooks Macdonald think

As markets recalibrate their expectations around policy accommodation, central bank watchers will be wondering if the US election outcome changes the thinking at the Federal Reserve. Ahead of the latest Fed meeting decision due later today, Fed Chair Powell has been vocal in the past in calling for additional government fiscal stimulus, and reminding markets that while central banks have ‘lending powers’, governments have ‘spending powers’. If the risks of a split Congress and political gridlock are confirmed in the days and weeks ahead, then it may well be the case that the Fed looks to try to pick up the slack in as much as it can, although clearly markets will likely judge this to be a second-best outcome to additional government spending. If it is the case that we might see, on balance, a combination of more monetary easing and less fiscal support than previously expected, then this could risk limiting reflation hopes, and would be something of a redux of the past ten years since GFC. In such a scenario, longer-duration growth assets would continue to be favour.

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