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Abu Dhabi, UAESunday 24 January 2021

Markets 'pre-positioned' for Biden to beat Trump but main worry is a contested election

John Hardy, head of FX strategy at Saxo Bank, outlines market scenarios depending on the election’s outcome

Uncertainty in Pennsylvania is a potential “perfect storm” for a contested election that would send market shockwaves, but investors are otherwise expecting a Joe Biden win.

“The market is a bit pre-positioned for the Democratic wave, unlike last time,” John Hardy, head of FX strategy at Saxo Bank, said, adding that markets were in no way prepared for President Trump's victory in 2016.

He joins co-hosts Mustafa Alrawi and Kelsey Warner this week to discuss those lessons learned and outline market scenarios depending on the election’s outcome.

A contested election, or one where Mr Biden wins the presidency but Democrats fail to take the Senate, would be a “train wreck”, according to Mr Hardy, who has been writing about the lead-up to the election.

It would mean the risk of a “scorched earth” campaign by an obstructionist Republican Senate, which had a history under Obama in particular of blocking everything at all times.

A decisive victory for Democrats would mean the US dollar will weaken on the back of fiscal stimulus in the form income replacement, health care and the Green Agenda, Mr Hardy said.

A Biden administration will also dampen risk appetites, and the market will demand a higher return on higher risk and higher growth stocks with cash flows so far off in the future, he said.

Big Tech would come under pressure as Democrats are looking to break up monopolistic behaviour.

A ‘blue wave’ scenario “helps to prevent any sort of Trump obstructionism or accusations of voter fraud”, he added, even if the results are not immediately clear in Pennsylvania.

If Mr Trump ekes out victory, the US dollar would likely spike strongly higher by a couple of per cent, mostly as an unwinding of the 'blue wave' scenario that is already partly priced into market expectations before the election, Mr Hardy predicted.

Markets are bracing for Tuesday’s results after global equities had their worst week since March when election uncertainty and a worsening Covid-19 crisis came to a boil in trading.

The market drop means it is forecasting - by a tiny margin - that Mr Biden will win, according to CFRA Research's Presidential Predictor.

The stock market is a reliable predictor: when the S&P 500 fell in the three months leading up to the November vote during a presidential election year, the incumbent president or party of the outgoing president has lost the election 88 per cent of the time since World War II. When the index gains during that period, the incumbent or party of the outgoing president has won 82 per cent of the time.

The stock market was betting on a Mr Trump victory up until Friday, when the S&P 500 fell 1.2 per cent - sending stocks negative over the past three months, and the advantage shifting to Mr Biden.

Mr Hardy agrees with Wall Street, predicting that the Democrats “will eke out a solid or better Blue Wave result in this election”.

In this episode

  • 1:16 How are the markets affected in the run-up to the election?
  • 4:39 Biden win and a 'blue wave' scenario
  • 7:54 Where does coronavirus fit in?
  • 9:35 The power of Pennsylvania
  • 12:03 The possibility of a contested election
  • 14:06 The three scenarios
  • 17:10 Markets don't like uncertainty
  • 20:10 Headlines

Updated: November 2, 2020 02:48 PM

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