Barring major surprise, Biden is next US President
Widespread expectations of a blue sweep did not come to fruition yesterday as the phenomenon of the “silent Trump voter” came into play yet again.
With Trump taking key swing state Florida and Biden winning Arizona on election day, it was a very close call between both candidates, until Wisconsin and Michigan were declared for Biden a few hours ago.
At the time of writing, having just won Wisconsin and Michigan, Presidential candidate Joe Biden has obtained 264 electoral votes.
Biden currently remains in the lead for Nevada, which yields 6 electoral votes. Should his lead hold up, then we would expect him to reach the 270 electoral votes necessary to win the Presidency.
Risk of contest by Trump cannot be ignored
As widely anticipated, Trump’s campaign has threatened legal action due to claims of widespread voter fraud, especially in the aftermath of the Michigan and Wisconsin results.
This could escalate further if he wishes to attempt recounts in states that Biden has won with narrow margins, and there is the risk that this could inject renewed uncertainty into markets.
For now, investors have mostly disregarded the tail-risk of a prolonged and chaotic contest by Trump, mostly due to the relief from getting over the election hump, and because it is unclear if Trump has a concrete legal basis for contesting the results.
Congress likely to remain divided with Senate under Republican control
Given a close race between Biden and Trump, it is not surprising that flipping the Senate now appears to be a tall order.
At this point, barring major surprises, we believe that Biden will take over the administration with a divided Congress, that is, the Senate under the control of a Republican Party majority, and the House of Representatives by the Democratic Party.
We expect the Republican Senate to take an obstructionist role, similar to what we saw in the last years of Obama’s Presidency, and believe that the prospects of major legislation are significantly lowered.
On the bright side, Trump’s tax cuts are unlikely to be reversed under this scenario; but on the other hand, the odds of sweeping stimulus spending on infrastructure, environment, and healthcare that Biden has proposed are far diminished.
We believe that Biden’s first order of business will be to manage the Covid-19 pandemic, and, in the first few months of his Presidency, focus on pushing through a new Covid-19 relief package to provide much needed unemployment and business support.
Despite a Republican Senate in place, we believe that there is sufficient common ground between both parties to enact a relief aid package that is around USD500 billion in 1Q 2021, which will be critical in supporting the nascent post-pandemic recovery.
Later in his term, Biden is likely to focus his attention on infrastructure spending, which has some bipartisan support, but again the Republican Senate is likely to only greenlight a far smaller package (by our estimates around USD500 billion) versus what Biden has proposed in his campaign agenda.
This is second best scenario for investors; market outlook remains positive
Overall, despite the scenario of a Biden win with a divided Congress only second best for markets, we still see many positives.
First, the reduced uncertainty from putting the election behind us will help investor sentiment, and also give the Fed the necessary clarity for crafting policy ahead.
The expectation that Biden’s team will be more strongly positioned to manage the Covid-19 pandemic than Trump’s administration will also boost investor sentiment.
Under a Biden Presidency, we expect an overall environment characterized by the post-pandemic economic recovery, moderately higher inflation, and a weaker US dollar. This will be broadly supportive of equities, credit, commodities, and emerging markets.
This has been broadly reflected in the market moves so far. US equity futures fluctuated between positive and negative territory throughout most of Wednesday before US markets opened, but the S&P 500 ultimately performed strongly in yesterday’s trading session, ending 2.2% higher.
Similarly, the US dollar saw an initial knee-jerk appreciation on Wednesday (particularly against the CNH) but has since retraced these moves. We expect the long-term trend of dollar weakness to continue.
Over the medium to long term, we believe the market outlook remains positive given the long-term post-pandemic recovery and the accommodative stance of major central banks. Macro trends such as sustained ultra-low rates and waning US dollar strength remain supportive of risk assets.Disclaimer applicable to recommendation
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Version: July 2020