- US election ‘aftershocks’ continue – equities roar higher, dollar slips
- Several theories floated to justify this relentless rally, but question is, can it last?
- Markets may revert to trading covid news and prospect of fiscal package
- Crunch time in Brexit talks too, traders seem confident a deal is coming
US stocks back near record highs
It’s official. Joe Biden was declared the new president-elect of the United States over the weekend, injecting another dose of optimism into global markets even as the Trump campaign vowed to challenge the result in several states.
The Senate will likely remain under Republican control, though that is not certain yet, as the state of Georgia will hold special runoff elections in January. If the Democrats win both of those seats, the Senate would be tied at 50-50, giving vice president-elect Harris the casting vote.
Still, the markets have been partying like there is no tomorrow, undaunted by the prospect of a divided Congress that will likely entail much smaller stimulus packages to heal the economy. Wall Street futures suggest another 1.5% gain for the S&P 500 at the open today, which would bring the popular index less than 1% away from its record high.
Why are markets so sanguine?
Several theories have been floated to explain this tidal wave of euphoria. For instance, President Biden cannot implement his tax-raising agenda with a split Congress, the Fed will be forced to dial up its stimulus game now that powerful fiscal relief isn’t coming, and big tech will likely dodge new antitrust regulations.
Frankly though, all these explanations seem to be spinning the narrative to fit the price action. Biden was always unlikely to raise taxes in any significant manner, and while the Fed may indeed be more aggressive now, it simply cannot do enough to negate the damage caused by the absence of a mighty relief package.
Rather, the real answer may be much simpler: there is just no alternative to equities. The world is flush with liquidity and absurd amounts of cash were probably sitting out waiting for the election ‘risk’ to pass. Loose-money policies have proven to be the most potent anti-virus drug for the markets yet, because now that most bonds are negative-yielding assets, all that’s really left are stocks.
The question now is, can this risk-on wave continue or is it running on fumes? Admittedly, if Europe going back into lockdowns and the US election being this uncertain barely left a scratch on markets, it is difficult to see what will bring them down. Trump going to the Supreme Court may simply be viewed as delaying the inevitable. That said, with valuations being this stretched, it might not take much negative news for a ‘reality check’ moment either.
Dollar bruised, commodity FX rides the risk-on tide
The aftershocks of the election continue to reverberate through the currency arena too, where the commodity-linked currencies are advancing mostly at the dollar's expense. The greenback has been battered by a triple whammy of expectations for a more aggressive Fed, calmer US-China relations, and the broader euphoric atmosphere.
Indeed, the Chinese yuan hit a fresh two-year high against the dollar today, echoing a similar breakout in the New Zealand dollar, both signaling expectations for a less hostile US-China relationship and a boost in global trade flows.
Euro/dollar tried to knock on the $1.19 zone but failed. The world’s most traded currency pair will remain at the mercy of post-election flows, relative Fed/ECB policy, and the outcome of the Brexit talks. However, we are now near levels that are ‘alarming’ for the ECB, so any further upside from here may increasingly difficult as verbal interventions return.
Finally, the Brexit talks resume this week. We haven’t seen a breakthrough yet, but both sides suggest progress has been made, and the latest ‘deadline’ for a deal is mid-November. While this date will likely pass without one, an agreement by year-end is still the most realistic outcome. Neither side can afford to add a no-deal Brexit to the long list of problems faced by their economies, so compromises will eventually be made.