Tuesday, November 3, 2020

Asia TImes: The key focus for election day: The Senate, outcome delays and swing states

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Market Recap: Key focus for election day: The Senate, outcome delays and swing states

Stocks in the US surge just as the presidential elections get underway, as valuations continue to converge between sectors possibly due to investor positioning. However, it remains to be seen how long this upcycle will last in the short-term, as volatility remains at heightened levels due to the uncertainty surrounding the duration needed for officials to tally mail-in ballots. As for the long-term, our view is little changed, i.e. only the magnitude of a fiscal stimulus bill is dependent on the outcome. Democratic sweep will likely result in large magnitude of fiscal spending which should materialise at earliest towards the end of the year, or at the start of 2021. The worst-case scenario in our view is a republican-controlled Senate, since any fiscal spending bill is likely to be of a smaller size, and may result in more delays due to another potential gridlock. Either way, cyclical stocks are more likely to benefit from additional financial aid from the government as opposed to tech shares, implicitly meaning that valuations between tech shares and other sectors are likely to continue to converge.

Indexes Daily Change (%) Net Change Closing Price
Dow +1.60% +423.45 26,925.05
S&P500 +1.23% +40.28 3,310.24
Nasdaq +0.42% +46.02 10,957.61
*Source: Bloomberg

More cyclical sectors also probably benefitted from the increasing odds for a Democratic sweep, with FiveThirtyEight now projecting a Biden win with a 90% possibility, as well as a 75% chance for Democrats to gain control of the Senate. That said, it will probably be wise not to count US President Donald Trump or republicans out of the race just yet. This is due to VIX trading at high levels, which signals that downside could potentially be strong given unexpected circumstances. Additionally, key swing states to take note of is Florida, Pennsylvania, Michigan and Arizona. As Trump will likely need at least two, if not all of these to have a chance at winning the elections. This is also assuming that Trump wins in Texas, Georgia and North Carolina, states that usually lean Republican but are close between Biden and Trump in current polls. Another key focus will be on the Senate, with betting markets pricing in a stronger likelihood for a Democratic majority despite the battle there being fairly closer than the in the presidential race.

Latest Biden-Trump Spread in Swing States

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The Battle for control over the Senate may be closer than expectedm, while Democrats may be able to add seats to its majority in the House

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S&P500 sectors started the week broadly higher, but the shift away from tech stocks was evident. Energy shares led gains thanks to the uptick in oil prices. JPMorgan dropping tech in favour of banking and insurance stocks may have also driven this shift, with the major US bank dropping its bullish position on tech in for the first time in almost two years. Sectors aside, stocks related to travel and leisure were at the bottom of the S&P500, with several airlines and cruise liner stocks falling upwards of 1%. The movement in the stock market appears to be mostly logical in this case, since travel and leisure is likely to still face strong headwinds with daily Covid-19 cases continuing to spike across the US and the EU. While governments across the world has no intention to return to lockdowns to the extent of that in April and May, the major risk to look out for is hospital occupancy in our view, especially with the flu and winter season in play.

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G10 currencies were mixed against the dollar, but commodity-linked currencies led gains in line with sector performance in the US stock market. The Canadian, Australian and New Zealand dollar likely benefitted from the shift towards cyclical assets on the day. The Canadian dollar was likely also boosted by the uptick in crude oil prices on Monday as well.

The Reserve Bank of Australia (RBA) looks likely to ease monetary policy today. While the Australian economy has been relatively stronger compared to developed markets outside of Asia during the pandemic, RBA policy makers has been fairly vocal about additional monetary stimulus to help support the economic recovery in the country. In the last RBA monetary policy meeting the RBA intensified its dovish language in its statement, highlighting its considerations for additional policy to support employment in the country. We expect either a rate cut or an expansion of quantitative easing specifically targeting longer-termed government bonds today, which is likely to result in some downside in the Australian dollar despite markets already pricing in an 83.3% probability of a rate cut.

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Safe haven assets ended mostly higher on Monday, suggesting that some hedges were likely made ahead of election day. Gold and silver both rose. But the Japanese yen fell against both the dollar and the euro. US Treasuries mostly fell, pulling benchmark 10-year yields 3 bps lower to 0.84%. The CBOE volatility index, VIX, fell 2.34% but remains at elevated levels as it continues to trade near 37.00.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.89% +16.67 1,895.48
Silver +1.83% +0.43 24.09
USD/JPY +0.06% +0.06 104.72
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.2bps 0.15%
10-Year -3.0bps 0.84%
30-Year -4.3bps 1.62%
*Source: Bloomberg

Oil futures fell on reports that Russian oil producers were discussing the possibility of delaying the planned production hikes by OPEC+ in January. A Bloomberg report citing people familiar with the matter suggested that Russian Energy Minister Alexander Novak had discussed the possibility of delaying the scheduled easing of output cuts by three months. The report also said that there were discussions on potentially deepening the current level of curbs, but that this possibility was small and not the main focus of discussions. The report is the latest of signals from OPEC+ members that the bloc was reconsidering hiking crude oil production come January, as major developed markets return to varying levels of lockdown restrictions. While oil is likely to still experience headwinds due to demand issues, as well as supply issues due to the influx from Libyan oil production, low prices may be enough to attract longer-term investors since oil likely still has room for at least an additional upcycle before the stronger transition towards clean energy across the world.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +2.71% +1.03 38.97
WTI +2.85% +1.02 36.81
*Source: Bloomberg

In Asia, stocks look set for gains, tracking the recovery in US markets as well as benefitting from a possible shift towards value plays. The KOSPI and ASX200 were each trading upwards of 1% in the early hours of Tuesday's trading session. The Tokyo Stock Exchange will remain closed for the day for a holiday and reopen tomorrow. Futures tracking major indices in the US were trading well into the positive range as of 9.21am (GMT +8) as well, signalling the that positive sentiment may be here to stay for the day.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei - - 23,295.48 -
KOSPI +1.44% +33.56 2,333.72 9:31:00 AM
ASX200 +1.62% +98.30 6,049.60 9:30:44 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.48% +128.00 26,924.00 9:21:01 AM
US Futures +0.38% +12.50 3,313.00 9:21:02 AM
Nasdaq 100 Futures +0.30% +33.25 11,096.50 9:21:02 AM
*Source: Bloomberg

Economic releases for the day ahead include (all timings in GMT +8):

  • RBA Monetary Policy Decision/Statement (11.30am)
  • US Sep Factory Orders (11pm)