US futures and dollar gain as Trump odds rise in election outcome

A surge in mail-in ballots has made it more likely that some states won’t be able to declare a winner immediately, which exposes markets to a drawn out process for determining the next president

Money dealers discuss trade between foreign currencies as they follow the US presidential election vote count, in Tokyo. EPA

US equity futures rallied, briefly triggering a volatility halt in Nasdaq contracts, as Donald Trump’s surprisingly strong election showing snapped stocks back into a rally mode that has prevailed most of the last year.

December contracts on the S&P 500 rose 1.3 per cent as of 10.53pm in New York, while the swift rally in Nasdaq 100 futures triggered an exchange-mandated two-minute trading pause. The gains in the broader contract reached topped 2 per cent before pulling back. Treasury yields plunged, with the 10-year benchmark down to 0.83 per cent and Bloomberg’s dollar index rose 0.5 per cent.

Mr Trump has an early lead in several contested battleground states that would be key to his re-election chances, while challenger Joe Biden is turning to the Midwest for support in his bid to take the White House. The race for control of the Senate remains up in the air.

“Everything flipped, just like in 2016, and it seems like it could be a very large Trump win, which means no contested election – and that’s what the market wants,” said Scott Bauer, chief executive officer at Prosper Trading Academy. “They just don’t want this to drag on.”

Markets have been volatile during the final weeks of the campaign as investors fretted over the potential for a contested outcome, a surge in coronavirus cases and stretched valuations that make megacap tech shares look expensive as the economic rebound starts to slow. The S&P 500 has moved at least 1per cent six of the past seven sessions.

While Mr Biden’s solid lead in polls had some investors speculating there would be a relatively quick decision on who will prevail, a surge in mail-in ballots has made it more likely that some states won’t be able to declare a winner Tuesday. That exposes markets to a drawn out process for determining the next president.

Adding to anxiety is that markets haven’t always been prescient in knowing what outcome they’d prefer. In 2016, Mr Trump’s perceived recklessness was considered bad news for a stock market that detests uncertainty. Futures plunged the maximum 5 per cent as he took the lead late on November 8, 2016. By morning, as investors warmed to his pledges of cutting taxes and slashing regulations, futures had rebounded higher. The S&P 500 has rallied 57 per cent since his surprise win.

Investors have come around on Mr Biden as his lead solidified, banking on his promise to broker a massive aid package to jumpstart the economy hit by the pandemic. Assets seen benefiting most from a Biden administration have climbed alongside his polling lead. The Invesco Solar ETF, ticker TAN, has surged over 140 per cent in the past six months, buoyed by optimism that Biden would boost infrastructure and green-energy spending.

Hopes of a multi-trillion fiscal aid package has boosted benchmark Treasury yields to the highest level since June, dragging beaten-down shares of financial companies higher as well. Meanwhile, the Nomura-Wolfe Biden Election Basket – a group of stocks that wagers on potential winners from a Democratic victory while betting against shares seen as losers – climbed to a record on Monday. The basket holds 30 pair trades across sectors including technology, health care, utilities and others.

But not all outcomes under Mr Biden are considered market-friendly. He also has pledged to roll back the huge tax cuts that Mr Trump handed corporate America back in 2017, a move that, irrespective of the public-policy merits it may have, at least has the potential to create stress for equities. Democrats have also promised tighter financial regulation and will look at how megacap tech companies operate.

Another possibility is that a Biden win is not accompanied by Democrats taking over control of the Senate, leaving Congress divided. That could temper expectations for a spending bill and threaten to stall much of Mr Biden’s platform.

The S&P 500 retreated in both September and October after a torrid summer rally. It closed Tuesday about 6 per cent below its all-time high.

While trades reflecting a Democratic sweep held firm, betting markets aren’t convinced. One gauge slipped to just over 50 per cent odds of the so-called Blue Wave – that Democrats oust Trump and take Congressional majorities. Traders hedged prospects of post-vote volatility, driving a measure of expected swings in China’s yuan to its highest level in more than nine years.

“The closer the race is, the bigger the risk is,” said Erika Karp, founder and CEO of Cornerstone Capital Group. “A close outcome is a risk to the market. The longer it drags out, the bigger the risks.”