Markets give thumbs-up to expected election result

Australia’s sharemarket finished the week with a 4.4 per cent rise, with the S&P/ASX 200 closing on Friday at a more than two-week high of 6190.2.

Australia’s sharemarket finished the week with a 4.4 per cent rise. Picture: AFP

US election week turned out surprisingly well for the global sharemarket, considering Donald Trump immediately contested the results and the closer-than-expected votes gave little chance of the expected overwhelming victory by Democrats unleashing unbridled fiscal stimulus.

But large US growth stocks led a charge in global markets amid a drop in US bond yields, as the expected scale of fiscal stimulus was dialled back and fear of greater antitrust regulation and higher corporate and capital gains taxes associated with a blue wave scenario also dissipated rapidly.

In many ways it was viewed as the best of both worlds, at least for growth stocks, many of which are also “COVID-19 winners” — which was relevant as the daily COVID-19 count in the US hit a record.

Later in the week there was an encouraging move back into value stocks, even as the energy sector continued to be pummelled by falling oil prices due to concern about the impact on demand from the pandemic.

The Russell 2000 index of small US companies surged along with the S&P 500 materials and ­financial sectors on Thursday, as the vote count showed a pathway to Democrats being able to secure a small majority in the Senate after run-offs in January — favouring bigger stimulus without radical change.

That move carried through to the Australian sharemarket, where the S&P/ASX 200 materials sector was strongest — albeit with help from a jump in gold ­prices — and financials also fared well enough.

Australia’s sharemarket finished the week with a 4.4 per cent rise, with the S&P/ASX 200 closing on Friday at a more than two-week high of 6190.2. But that paled in comparison to the S&P 500, which was heading for a 7.4 per cent gain, and the growth-heavy Nasdaq 100 index, up 9 per cent.

As well as the bearish key reversal of the US 10-year bond yield from a five-month high of 0.9435 to a three-week low of 0.7162 during the week, it’s worth noting that the VIX volatility index dived from a five-month high near 41 per cent to a three-week low of 26.04 per cent amid unwinding of options hedges associated with the election.

The pullback in volatility could also cause risk-parity funds to invest more in risk assets including equities, but it’s hard to see a further evaporation of volatility being sustained given Mr Trump’s stance.

There was also potential for the S&P 500 and Nasdaq 100 to form symmetrical triangle consolidation patterns after finding resistance from lines drawn across their rebound highs.

If those resistance lines hold and the VIX index bottoms out, there may be scope for a pullback in both the US benchmark stock indexes in the order of 7-8 per cent in coming days.

But AMP Capital’s head of investment strategy and chief economist, Shane Oliver, said a resolution of the US election was offering more fiscal stimulus, fewer trade wars and probably avoiding US tax increases. “While the rebound in shares may be surprising given that the election is not fully resolved yet, US shares typically rally after close elections as we move into the stronger seasonal months for sharemarket performance of November, December and January,” he said.

Still, the US economic risks are building, as much-needed US fiscal stimulus has been delayed for months and might not be agreed until late January and implemented in March or April.

AMP Capital’s “US Economic Activity Tracker” was already rolling over amid booming COVID-19 cases.

Citi’s “US Economic Surprise Index” showed US data has been less positive since July, when the index hit a record high after the inevitable bounce from a record low in early May.

As counting is continuing in key states, Joe Biden looked set to reach the needed 270 or more electoral votes by holding onto Arizona and Nevada, or by pushing out Mr Trump in Georgia and Pennsylvania, where the tallies were much closer.

AMP’s Dr Oliver said that with possible run-offs for both Senate seats in Georgia in early January there is also the possibility — albeit less than 50 per cent — of the Democrats ultimately getting a “clean sweep”, having retained control of the House, if they win both seats in Georgia.

If Mr Trump were returned, that would favour low taxes and regulation and fast agreement on moderate fiscal stimulus, giving a short-term boost to US shares. But trade wars with China and possibly Europe and Japan would probably ramp up again next year, which would be relatively bad for global shares and good for the US dollar, according to Dr Oliver.

“This scenario would likely be a negative for the Australian dollar and shares, particularly as it could contribute to a further ramping up in tensions between Australian and China, which as we have seen in the past week are still on the rise,” he said.

Dr Oliver said the likely outcome of a Biden presidency and Republican Senate would be the best for global and Australian shares, as it would stop US tax rises and see more fiscal stimulus without excess, fewer trade wars, and less divisiveness in the US.

“Historically a Democrat president and divided government has been the best outcome for US shares,” he said.

“Australia would benefit from less tension with China and a focus on a diplomatic approach to resolving trade tensions.”

But if Mr Biden wins and gets control of the Senate via Georgia and the casting vote of the vice president, it would clear the way for much more US fiscal stimulus but higher corporate tax in the US and more regulation, boosting global shares more than US shares, and the US dollar would probably fall.

“Historically this has been the second-best outcome for sharemarkets,” Dr Oliver said.