US elections outcome may not be critical for markets; check what trumps the White House race

The US Presidential election, that has now stretched into the third day of counting, is seeing stock markets rally even though the White House remains hanging in the balance. In his weekly newsletter Greed & Fear, noted market strategist Christopher Wood said that the most important thing for financial markets in coming quarters is how the Fed responds when the American economy rebounds after the coronavirus health crisis has passed. He adds that if the US election outcome is not as critical for financial markets as it is made out to be, it is certainly important for America as a society as it reveals again the dramatic polarisation.

Chris Wood, the global head (equity strategy) at Jefferies, added that from a market standpoint,  the US Fed’s continuing dovish backstop regardless of who wins is the key point. “… it is also a positive that continuing Republican control of the Senate should block many of the more socialistic measures advocated by the Bernie Sanders wing of the Democratic Party,” he said. From an equity perspective, Chris Wood believes that the stark contrast in energy policy between the two parties is the main differentiation.

“Interestingly, there has been a perception that a ‘Blue wave’ would have been most bullish cyclically because it would have resulted in greater fiscal stimulus in the short term,” Chris Wood said while adding that a fiscal stimulus is not as all powerful as it is cracked up to be. He also noted that some argued that re-elected Donald Trump would also be bullish as he is most likely to stop lockdowns again. But concluded that Democratic control of the White House might make the party focus more on the economy and less on Covid, now that Covid has probably helped Biden secure the White House by the narrowest of margins.

Further, Chris Wood noted that a victory for Joe Biden is US Dollar bearish. “It is also the case that a Biden victory, as already noted, is US dollar bearish because of the likely growing convergence of fiscal policy and monetary policy, and therefore renminbi positive,” he said. This, according to him, is another reason to overweight Chinese equities and indeed emerging market equities since China accounts for 43% of the MSCI Emerging Markets benchmark.