November 7, 2020 government

Global stocks ease back as Joe Biden nears the US election finish line

Global stocks eased back on Friday as Democrat Joe Biden pulled ahead of President Donald Trump, with Wall Street's main indexes giving back some of the week's sharp gains as investors awaited the outcome of a nail-biting US election.

As Mr Biden took the lead in the battleground states of Pennsylvania and Georgia, putting him on the verge of winning the White House race, investors in Europe and on Wall Street grew increasingly jittery. Republicans could retain control of the US Senate pending the outcome of four undecided Senate races and they would likely block large parts of Mr Biden's legislative agenda, such as expanding healthcare and fighting climate change.

Stock markets soared midweek and, having moved so far so fast, have shown little desire to push higher into the weekend.

Chris Beauchamp, IG

“The ongoing risk-on phase that has been driving stocks sharply higher appears to be borne of the fact that even if Biden does take the White House, his progressive wings could be clipped by the likely inability to take both Senate and House,” said Joshua Mahony, senior market analyst at online trader IG.

The US election week has seen heightened volatility after investors bet on a Mr Biden win, paving the way for a bigger fiscal stimulus package than would have been dished out under the re-election of Mr Trump. Meanwhile, a Republican-controlled Senate will make it unlikely that Mr Trump’s corporate tax cuts will be rolled back.

Non-farm payrolls came in ahead of expectations, with US employers adding 638,000 jobs in October, as the labour market continued its slow rebound eight months from the start of the pandemic-fuelled downturn.

While the figures were still down on last month, the drop below 7 per cent for the unemployment rate provides further evidence that the US economy is recovering.

'Stock markets soared midweek and, having moved so far so fast, have shown little desire to push higher into the weekend. But with the US election and job numbers out of the way, the road ahead looks much less bumpy, giving space for a further rally,' said Chris Beauchamp, chief market analyst at IG.

'Hopes of a US fiscal stimulus will continue to play a part but given the likelihood of a standoff between the new president and a Republican Senate, investors should not get their hopes up. The lack of a ‘blue wave’ means a smaller bill is likely, but this could turn out to be risk-positive given that it will mean the Fed cannot afford to relax its own stimulus efforts.'

The S&P 500 edged lower on Friday after posting the biggest four-day increase since April, while the tech-heavy Nasdaq 100 dropped even more after outperforming the benchmark index all week. Treasury 10-year note yields climbed back above 0.80 per cent and the dollar strengthened from a more than two-year low.

“US futures are stalling today, and we are seeing traders shaving some profit of their trades today,” said Naeem Aslam, chief market analyst at Avatrade.

“After posting the worst week since March last week, the US stock market is on track to post the best week since April this year. Traders have taken the current sell-off as an opportunity and went after the big names which were selling at a heavy discount.”

Despite Friday's losses, the benchmark S&P 500 and the Nasdaq were on track for their best week since April as the prospect of a policy gridlock in Washington eased worries about tighter regulations on US companies.

Listen: How the US election affects your investment portfolio

Mr Aslam said the current momentum for tech stocks contrasts with a lacklustre performance in other sectors.

“The tourism and hospitality sectors are especially underwater, and investors are eagerly waiting for potential vaccine news, which is imminent,' he said.

'It is highly likely that we will get the news any day, and the moment that news will hit terminals, we could see airline, hotels, and other hospitality-related stocks surging through the roof.'

While the world waits for more clarity from the election result, US investment bank Goldman Sachs pinpointed two key dimensions from a win for Mr Biden that could affect emerging market assets: a change in trade policy and a different approach towards fiscal policy.

“A Biden presidency, however narrow, would likely make less use of tariffs and quotas, and would likely prefer a more multilateral approach to global trade. That would continue to benefit the CNY and China-linked assets that have been the most direct target of US trade protectionism,” the bank said.

“Second, fiscal policy – which requires all parts of government to work together – is likely to be slower and less expansionary than under a united government. This is a negative cyclical impulse for the US and the rest of the world relative to the counterfactual of a united government.”


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