No blue wave but US stimulus still likely
Just because it seems unlikely that in the US election the Democrats will take both the White House and the Senate, it does not mean that capital markets should become despondent about a fiscal stimulus package that could have reached $2.3tr had the so-called "blue wave" made a clean sweep.
Investors bought stocks galore on Tuesday in anticipation, abandoning US Treasuries in the process. From the polls opening on Tuesday to the end of Wednesday, the 10 year yield rose from 0.857% to 0.895%.
But when it became apparent the Democrats were not about to take over the entire legislative branch of government, investors piled back into govvies, fearing less state support for the economy than they had hoped for. That sent the 10 year Treasury yield bombing to 0.78% on Thursday.
The likeliest outcome as GlobalCapital went to press before the final count, was Democrat Joe Biden taking the presidency but the Republicans keeping control of the Senate. But that will not be the threat to equity prices that many anticipate.
There is no doubt that a Republican-dominated Senate will do its utmost to hamstring and frustrate Biden. Big infrastructure spending is unlikely to pass and the same goes for corporate tax hikes.
But despite the hostility between the two parties, both acknowledge that the US needs a substantial economic package to see it through the Covid-19 crisis.
They disagree on the size of that package. The Republicans think $850bn is the right amount, so many predict the final deal will fall somewhere between the two parties' desires.
Biden and Republican majority leader Mitch McConnell have years of experience working with each other from the former’s time in the Senate and an eventual deal is likely, if not inevitable.
The other elephant in the room, besides the Republican Party, is of course the Federal Reserve. Monetary stimulus is more than likely to keep asset prices well supported in the months to come, regardless of the fights taking place between the White House and the Senate.