(Bloomberg) – US stock futures got lower and the dollar rebounded on government bonds as investors braced themselves for the likelihood it would take days to determine the outcome of the US presidential election.
December contracts for the S&P 500 fell 0.4% to 9:46 p.m. in New York. The cash index has risen 3% in the past two days. Government bond yields fell, with the 10-year benchmark falling 0.80% and the Bloomberg dollar index rising 1%.
Polls are closed in much of the country and President Donald Trump is just ahead in some key battlefield states. The latest polls, conducted before the vote began on Tuesday, showed that Democrat Joe Biden had a solid lead over Republican Donald Trump nationally, but had much narrower spreads in key states.
“To the extent that investors have hoped for either quick clarity or massive fiscal stimulus, those hopes will be scaled back,” said Max Gokhman, head of asset allocation at Pacific Life Fund Advisors.
Markets were volatile in the last few weeks of the campaign as investors worried about the potential for a controversial outcome, a surge in coronavirus cases, and stretched valuations that cause megacap tech stocks to get expensive if up the economic recovery slowed. The S&P 500 has moved at least 1% six in the last seven sessions.
While Biden’s solid lead in polls led some investors to speculate that there would be a relatively quick decision on who will prevail, a surge in postal ballots has increased the likelihood that some states will fail to declare a winner on Tuesday. This puts the markets in a lengthy process of determining the next president.
In addition, the markets did not always know in advance which outcome they would prefer. In 2016, Trump’s perceived recklessness was seen as bad news for a stock market that loathes uncertainty. Futures fell a maximum of 5% when he took the lead on late November 8, 2016. By the morning, as investors warmed up on his commitments to cut taxes and regulations, futures had risen again. The S&P 500 has gained 57% since its surprise victory.
Investors picked Biden as his lead solidified, backing his promise to deliver a massive aid package to help boost the pandemic-hit economy. The assets that benefit most from a Biden government have grown alongside its electoral margin. The Invesco Solar ETF, ticker TAN, is up over 140% in the past six months on optimism that Biden would boost infrastructure and green energy spending.
Hopes for a multi-trillion fiscal bailout package has pushed benchmark government bond yields to their highest levels since June, and also propelled run-down stocks of financial companies higher. The Nomura-Wolfe Biden voting basket – a group of stocks betting on potential winners of a democratic victory while betting against stocks considered losers – hit a record high on Monday. The cart includes 30 pair stores across a variety of sectors including technology, healthcare, utilities, and others.
But not all results under Biden are considered market friendly. He’s also pledged to roll back the huge tax cuts Trump passed on to American corporations in 2017, a move that regardless of political preferences, has at least the potential to create stress on stocks. Democrats have also promised tighter financial regulation and will examine how megacap tech companies work.
Another possibility is that a Biden victory won’t be accompanied by Democrats taking control of the Senate and dividing Congress. This could mitigate expectations of a spending calculation and threaten to bring much of Biden’s platform to a standstill.
The S&P 500 retreated in both September and October after a hot summer rally. It closed about 6% below its all-time high on Tuesday.
While trades that reflect a democratic swing have remained firm, the betting markets are not convinced. A measuring device slipped to just over 50% of the probability of the so-called blue wave – that Democrats oust Trump and take over the majorities in Congress. Traders hedged the prospect of post-vote volatility, pushing a measure of the Chinese yuan’s expected volatility to its highest level in more than nine years.
“The closer the race gets, the greater the risk,” said Erika Karp, Founder and CEO of Cornerstone Capital Group. “A tight result is a risk for the market. The longer it takes, the greater the risks. “
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