Market Mondays #24

US elections, their impact on the US market and more...

Last week in the financial markets

· ESG funds forecast to outnumber conventional funds by 2025

· BlackRock assets climb to record $7.8tn in third quarter

· UK credit rating downgraded by Moody’s

· China’s stock market value hits record high of more than $10tn

· Speaker of the House Nancy Pelosi set a Tuesday deadline for more progress with the White House on a fiscal stimulus deal before the Nov. 3 election

· Countries tighten restrictions and enforce new regulations as the number of COVID cases grow

Driving forces for the week ahead

Biden vs Trump

With only two weeks to go until the much anticipated US election, investors have been bracing themselves for the consequences that will come with the election’s outcome. 

Current betting odds are 65 per cent for the Democrats’ Joe Biden versus 35 per cent for Republican Donald Trump, although no conclusions can be drawn just yet given its unpredictability due to previous election upsets.

Initially, investors betting on a blue wave election outcome expected this to be negative for equities as it would result in higher corporate taxes and more regulation. Consequently, in the month of October, small-caps, which failed to keep up with large-caps in the rally since March, have begun to outperform large-caps as investors back away from growth companies and start focusing on value stocks. 

However, this is not entirely true. Although Biden’s presidency would potentially mean a rise in corporate tax and the abolition of Trump’s financial deregulation, it also opens opportunity for an array of different sectors such as renewables, utilities, consumer staples and material stocks. 

A blue wave election would pull the US debt market in two different directions. On one hand, treasury bond prices have already dropped as investors prepare for the likelihood of a big fiscal package under a potential Biden administration. On the other hand, municipal bonds are likely to thrive and rally significantly as much more federal aid for state and local governments is also expected. 

It’s important to note that based on past elections, changes in presidential administrations rarely lead to material fundamental changes in how the US economy works. Despite the consequences of the election’s outcome, these usually have a short-term effect on the market and ergo, investors’ portfolios. 

What else we’re reading

· EU ready to work with U.K. on legal text to break Brexit impasse

· Argentina bond rout blows up the template for debt restructuring

· Oil steadies as Saudis say nobody should doubt OPEC’s commitment

· At front lines of a brutal war: death and despair in Nagorno-Karabakh

This week’s key events and data releases

Monday: IBM earnings, ECB President Lagarde gives opening remarks

Tuesday: Pelosi fiscal stimulus deadline; earnings (P&G, Netflix, Snap)

Wednesday: The Fed’s beige book economic survey; earnings (Tesla, Chipotle, Verizon) 

Thursday: Final presidential debate; earnings (AT&T, Intel, American Airlines) 

Friday: American Express earnings

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