US stock markets have seen a pretty stunning reversal today; in the aftermath of last night’s US President debate, S&P 500 futures sunk to lows beneath the 3300 level. However, seemingly boosted by strong US data, promising sounds that we might actually get some US fiscal stimulus before the election and likely also month-end flows, the S&P 500 has now rallied back above overnight highs (in the future contract) to trade in around 3360. That’s a more than 2% reversal between highs and lows, something you don’t often see!
Let’s unpack what happened in more detail…
Biden seems to have come out on top in the aftermath of the last night’s debate, which at times felt more like a name calling/shouting match. CNN’s flash poll suggested that 48% of Americans thought that Biden won vs 40% for Trump. Perhaps more reliable evidence of the perception that Biden won can be found in betting odds moving in favour of the front-runner; according to Smarkets, implied odds of a Biden Presidency has now risen to over 60% from roughly 57.5% prior to the debate.
As to why stocks fell in the aftermath of the debate, there are a few trains of though doing the rounds to unpack. Some analysts argue that a Biden victory is the less desirable Presidential outcome given Democrat plans to increase corporation tax (a negative for stock valuation). Hence with rising odds of a Biden victory, stocks markets fell.
However, others are now arguing that Biden is the more favourable candidate to win in terms of stock valuations, or is at least neutral vs Trump, given that 1) Democrats will do big fiscal stimulus and boost the economy, which is good for earnings and 2) Democrats will take a softer line on trade, which is good for the global and US economy and again good for earnings. As to why stocks saw downside in the aftermath of the debate, these analysts argue that the downside is being caused by pre-election “political uncertainty” amid assertions from Trump towards the end of the debate that he might contest a Biden victory, amid his continued claims that the mail in ballots are fraudulent (there is no evidence to suggest this is true).
Market’s hate uncertainty, hence why the prospect of an unclear outcome of the election, or a President who refuses to leave office until forced out by the US Supreme Court, is hated so badly.
Data, US fiscal stimulus, Month-end flows
A few factors have contributed to the reversal in fortunes of the US stock market over the last few hours;
1) Chicago PMI data for September (a survey of manufacturers from around the Chicago area) came in significantly above expectations at 62.4 (exp. 52.0, prev. 51.2), the highest reading in the index since February 2019. ADP national employment data for September also beat expectations for 650k, coming in at 749k. Meanwhile, the estimate for the decline in US Q2 GDP was again raised a little higher (to -31.4% from -31.7%).
2) At the start of the week, negotiations on fiscal stimulus were seen as dead, and almost no one was expecting anything to get done prior to the election on November 3rd. However, early in the week the Democrats tabled a new $2.2trln proposal, and last night the Republicans were said to have tabled a counter proposal $1.5trln proposal (which could go to $2trln if needed). Talks appear to be back up and running a deal has again become a possibility, with US Treasury Secretary Mnuchin today saying that he expects that he and House Speaker Pelosi will deliver the response required for Covid-19 relief.
Moreover, the US House could consider the updated Covid-19 bill as early as today, but Democrat leaders are reportedly telling members to keep Thursday/Friday flexible.
So it seems that the two sides might again be on the way to a deal – I still think, given the toxic feel in the air between the two parties (as seen in last night’s debate) as we head into the election, a deal will be difficult to finalise. But the higher chances of a deal is risk appetite positive (and part of the reason why stocks went higher from earlier lows).
3) US equities have been hurting in September, so some month-end position adjustment in favour of the asset class was expected going into today by most institutions.
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