By Han Tan, Market Analyst at FXTM
It’s still too early to make a decisive call on the overall elections in the US, but markets appear to be paring back hopes for the so-called ’blue wave’.
Expectations of a landslide victory for the Democrats, priced into US equities in the first two trading days of the week, and indeed over the last month or so barring the selloff in late October, have not been vindicated. With both president Donald Trump and former vice-president Joe Biden racking up predicted easy wins early on election night, the jury is still out for key battleground states such as North Carolina, Georgia, Pennsylvania, Wisconsin and Michigan.
Judging by the initial market reaction, investors seem to be expecting the status quo to be maintained in the makeup of the US government.
The US Senate could still be a deeply divided chamber which will slow any passage of fresh fiscal stimulus. Such prospects are prompting equities to fall back from their initial overnight highs. Nasdaq 100 futures hit limit up, briefly halting trading, before paring gains, but the futures contracts for the technology index is outperforming those for the Dow Jones and the S&P 500.
The smattering of voting data in hand isn’t stopping some segments of the markets from trying to pre-empt the final result.
The Dollar index’s attempt to reclaim the psychologically important 94.0 handle is also indicative of the dampened expectations that the US Senate will adopt an obvious blue tilt. The Greenback is advancing against all of its G10 peers and its gains are in turn suppressing Gold prices. But to be clear, these moves in the DXY and Nasdaq 100 futures are not enough to break out of recent trends.
This presidential race could still throw up a variety of outcomes. Biden could still be declared the eventual winner. It’s also entirely possible that Trump could get a second term and avoid becoming the first one-term US President since George HW Bush in 1992. Such odds set up a potentially blockbuster finale to the elections, with these slower-counting states set to have a big say on who will hold the POTUS title over the next four years.
And whoever wins the upcoming presidential elections will still have a major say on how various asset classes perform over the next four years.
Until we reach a conclusive end, investors must continue braving this fog of political uncertainty. If there are growing signs of a contested outcome, riskier assets may struggle to hang on to recent gains which will benefit safe haven assets.
But for now, the wait continues.
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