What to anticipate ahead of the US elections Volatility 2020📌 US Elections have been and are always expected to be an extremely volatile event worldwide. Elections, similar to other political or banking sector events, are notably treated by market participants with anticipation and speculation.
📍 Hence as the US election looms, today's Chart is not in regards to the outcome but in regards to current markets positioning just a week prior to the election as well as their future response to each possible outcome.
📍 While we have been facing an overall weak Dollar in the second half of the year, the proclivity for capital being safe harboured in US Treasuries means this is hinged on the global growth outlook establishing a sustainable improving trend, and that in turn may hinge on the world getting through the Covid crisis. However, the upcoming US election presents risks too, particularly given the perceived chance of the election being contested.
📍 Markets are anticipating another US fiscal package, although the timing remains uncertain, and the size and scope of it will be dependent on the election result. Wall Street narratives suggest that US stock markets are pricing in a blue wave on November 3, with Democrats sweeping the House, Senate and Presidency, which would result in many trillions of Dollars in fiscal support.
📍 So far in October Biden's lead in the polls has deducted the risk of a contested outcome and hence supported the US Equity market to recover since September (after the 1st debate), but also drove the risk sensitive Yen. This comes in contrast with the historical reaction of Stock markets in prior elections.
📍 Historically, the stock market slows down and shows a weaker performance in the period leading up to an election, according to a study from US Bank. On average, the equity market showed a less than 6% gain during election years compared with an 8.5% gain in any other given year.
