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The not-so-amazing Presidential Race – three things for this week

US debt

 

  • In the US, 59 million votes have been cast a full week and a half before election day, suggesting that the electorate has more or less decided, leaving little room for late-game surprises.
  • Long term investors are shrugging off the Presidential race and focusing on the Senate. Control of all three executive and legislative branches has historically been the only key to unlock meaningful legislative changes. In this particular occasion, a “Blue Wave” will also determine the timing, size and composition of one of the largest stimulus packages the US has ever seen.
  • Long term investors are more worried about renewed lockdowns in Europe, which remind them that economic and investment fundamentals remain at the mercy of Covid-19. Prolonged crises in the real economy have a habit of exposing systemic weaknesses, which can then spill-over to a financial economy which has learnt to be reliant on artificial stimulus.

“Markets were little changed last week, as the eyes of investors and traders alike are fixed on the last yards of the US Presidential race. Meanwhile, Europe saw a string of lockdowns, and a modicum of concomitant civil disturbance, for the second time since last March.

“Markets have accepted that the higher probability event is a Biden Presidency. In the US, 59 million votes have been cast a full week and a half before election day. Donald Trump became President with 62 million votes in total. This, along with the very stable favourability ratings for the incumbent, suggests that the electorate has more or less made up its mind. Like 2016, it is now a question of how small margins swing in key battleground states, but polls suggest a likely probability that in January the Democrats will be in control of the White House and the House of Representatives.  For all the commotion, investors are focusing less on the Presidential race and more on the Senate, where the Democrats still have an advantage, albeit a less significant one. Control of all three (Presidency-Senate-House) is the key to unlock meaningful legislation which could change to status quo for markets. For Mr. Obama’s first term it meant Obamacare. For Mr. Trump’s first term it meant the biggest tax overhaul in the US for the last 35 years. So the question really, is not who controls the White House, but if any one party can control all three executive and legislative branches. And to that end, which stimulus package will be passed and by when.

“At the same time, long term investors are more worried about renewed lockdowns in Europe. Lockdowns remind portfolio managers that economic and investment fundamentals remain at the mercy of Covid-19. Complete lockdowns will have a devastating effect on private consumption, more than 50%-60% of GDP for developed countries and could hamstring the recovery. Prolonged crises in the real economy have a habit of exposing systemic weaknesses, which can then spill-over to a financial economy which has learnt to be reliant on artificial stimulus. This could challenge authorities to offer even larger fiscal and monetary packages to maintain stability, while still risking the balance of the global financial ecosystem.”

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