Markets rally on possible Biden win

Investors expect post-pandemic economic recovery, moderately higher inflation and a weaker US dollar under a Biden presidency

With the former Democratic vice-president Joe Biden inching closer to the 270 electoral seat mark and the prospect of a divided Congress appearing more likely, the odds of a greater fiscal stimulus package are slim, according to analysts.

Though markets traded sideways on Tuesday and a sweeping Democratic landslide lead failed to materialise, they rallied on Wednesday and Thursday. The Nasdaq 100 jumped 4.41 per cent a day after the president elections were held and on Thursday the Stoxx Europe 600 index climbed 0.9 per cent, with technology shares leading gains.

Overnight, the S&P 500 rose 2.2 per cent for its best day in five months. The benchmark index had gained 3.5 per cent before the market lost some of its momentum toward the end of the day.

The Nasdaq was the standout, notching its biggest gain in more than six months as traders doubled down on technology stocks. The Dow added 1.3 per cent while the Nasdaq gained 3.9 per cent.

Futures tracking the benchmark S&P 500 surged as much as 2 per cent, while the tech-heavy Nasdaq 100 futures gained 2.8 per cent.

“Investors have mostly disregarded the tail-risk of a prolonged and chaotic contest by president Trump, mostly due to the relief from getting over the election hump, and because it is unclear if Mr Trump has a concrete legal basis for contesting the results,” said Eli Lee, head of investment strategy at Bank of Singapore.

“There is the risk that this could inject renewed uncertainty into markets.”

With Mr Biden on the brink of victory, Asian investors are warming to the likelihood of a more conventional trade policy and improved foreign relations.

The MSCI Asia Pacific Index rose as much as 2.4 per cent in a fourth day of gains. Hong Kong’s Hang Seng benchmark led the region with a 3.3 per cent surge, while Tokyo's Nikkei 225 index climbed 1.7 per cent and South Korea's Kospi jumped 2.4 per cent.

In Australia, the S&P/ASX 200 gained 1.3 per cent. The Shanghai Composite index also rose 1.3 per cent.

European stock markets also had a good day, with the CAC40 up 2.4 per cent and the Eurostoxx 50 index up 2.0 per cent.

The MSCI Emerging Market Index jumped 2.5 per cent.

Emerging market bonds rallied, up nearly 0.9 per cent, on the hope that a new US administration, particularly under Mr Biden, "would have a more constructive attitude towards trade policy", according to Khatija Haque, head of research and chief economist, Emirates NBD.

Meanwhile, some of the market’s sharpest moves overnight were in yields for US government bonds, which had earlier risen on growing expectations for big economic stimulus.

The yield on two-year Treasuries climbed less than one basis point to 0.15 per cent while the 10-year US Treasury sank two basis points to 0.74 per cent on Thursday.

For now, investors have mostly disregarded the tail-risk of a prolonged and chaotic contest by President Trump, mostly due to the relief from getting over the election hump

Currency markets also displayed substantial volatility in the wake of the uncertain outcome of the US presidential election with most peers rallying higher against the greenback, although not to the same degree as the performance on election day.

Most market experts expect the long-term trend of dollar weakness to continue.

“The US was running a trillion-dollar deficit before Covid-19. Under a new President, that will not change, and the debasement of the greenback seems almost inevitable through 2021,” said Jeffrey Halley, senior market analyst, Asia Pacific at Oanda.

The Bloomberg Dollar Spot Index decreased 0.8 per cent, the euro climbed 0.9 per cent to $1.183 and the British pound gained 0.7 per cent to $1.3085.

Meanwhile, WTI crude dipped 0.9 per cent to $38.80 a barrel while Brent crude decreased 0.6 per cent to $40.99 a barrel.

“Oil markets seemed to perceive an uncertain outcome of the election as a positive as it would imply fewer restrictions on the industry in the US but also helping support prices is growing expectation that Opec+ will delay their production increase expected for the start of the year,” Ms Haque said.

A divided Congress means tax increases and tougher regulations on technology and financial companies would be difficult to pass

Gold prices strengthened 1 per cent to $1,921.41 an ounce.

Under a Republican Senate, the prospects of major legislation are significantly lower. The odds of sweeping stimulus spending on infrastructure, environment and healthcare, that Mr Biden has proposed, are diminished.

A divided Congress also “means tax increases and tougher regulations on technology and financial companies would be difficult to pass”, Ms Haque added.

Should Mr Biden be declared the winner, his first order of business will be to manage the Covid-19 pandemic and focus on pushing through a new relief package to address unemployment and business support, Mr Lee said.