Intraday Market Thoughts

Election Scenario #1: Blue Wave

by Adam Button
Oct 30, 2020 20:06

In the run-up to the election we will look at the most likely outcomes and how they will affect the market. The first scenario is a "blue wave"; a scenario where Biden wins and the Democrats take the Senate, while holding the House. There are currently 4 existing Premium trades open, short FB at 275 (now 261), short Netflix at 549 (now at 474), short NZDUSD at 9580 (now at 6611), long Bitcoin at 6300 (now at 13500).  Below is the Premium video for subscribers, ahead of US Polling Day. 

This scenario would give Democrats the most power, similar to Obama's first two years (Obamacare) and Trump's first two years (corporate tax cut). Given deep partisan divisions, it's a rare opportunity to be able to deliver on political promises.

In this election, it's also the most-likely scenario as measure by polls and betting markets. That said, it's a narrow probability, in the Senate in particular where Democrats will need to flip four seats to take control. Given that and the high uncertainty around the election, this outcome is not priced in.

For risk assets, this is the most-bullish scenario. It would mean a large stimulus package as soon as Biden takes office in January and would likely include further high spending and high deficits, particularly on green initiatives and infrastructure.

In FX, the US dollar would generally weaken and emerging market currencies would benefit, particularly the Mexican peso. On the other border, CAD may see some initial softness on worries about pipelines and anti-oil messages but expect that to be quickly overwhelmed by enthusiasm about growth.

With the dollar weakness and the promise of deep deficit spending, precious metals are the clear winners in the commodity market.

How strongly Biden can deliver on his promises may depend on how strong the wave is. A one-seat majority in the Senate would leave every initiative at the mercy of a single vote. A larger wave would raise the odds of more-aggressive measures and that could temper the market's enthusiasm. In particular, Biden has promised to reverse Trump's corporate tax cut along with raising taxes on incomes above $400,000 and/or on capital gains. On corporate taxes, Democratic House leader Pelosi hinted Thursday that might be a tough sell for her. Meanwhile, taxing higher incomes is unlikely to hurt the market but fears of a capital gains hike could cause selling – especially among high-flying tech stocks – before year end.


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