Local markets volatile as US election goes to the wire

Foreign exchange trading is volatile as results of the US election started trickling in.

“The market is nervous as these results come in,” BNZ strategist Jason Wong said.

“There is a lot of trading going on and we have seen quite a lot of volatility,” he said.

By 2.55 pm the Kiwi was at US66.86c, having gone through a wide US66.75 to US67.40 range.

In the US, share trading was finished for the day but S&P500 futures contract was down by 1 per cent.

US markets were positioned for a Biden win going into the election, and potentially one in which Democrats also take control of both the Senate and House of Representatives.

“The consensus seems to be that a Blue [Democrat] sweep will be positive for equity markets and negative for bond markets,” said one New Zealand bank strategist.

“A clear-cut Democrat win means the US is more likely to get fiscal support, which is more likely to be growth-supportive in the long run,” he said.

The New Zealand dollar has been trading steadily at around US66c since August, but has been firming over the past few days, rising to US66.80c this morning.

A strong Kiwi works against exporters as it means their US dollar receipts convert tofewer New Zealand dollars when they are repatriated.

BNZ’s Wong said the market had been pricing in a Biden win.

“Under a clean sweep Republican scenario, you would expect a weaker US dollar all round, meaning the Kiwi pushes on higher,” Wong said.

Strategists said a Biden win would be bullish for investor risk appetite, which has tended to favour the New Zealand dollar.

The offshore yuan, a key barometer of US-China relations, weakened 1 per cent after gaining by as much 0.5 per cent earlier amid speculation Democratic nominee Joe Biden would emerge victorious.

“We are going to see the market continue to swing from joy to sorrow as the exit polls come out for a while,” Tsutomu Soma, a bond trader at Monex Inc. in Tokyo told Bloomberg.

“A strong win by Biden would be risk-positive, which means that interest rates everywhere rise, equities everywhere rise, risk-sensitive currenciesrise and the US dollar goes down,” Westpac senior markets strategist Imre Speizer said.

At the other end of the spectrum, a Trump win is seen as being a negative risk, as would an inconclusive or contested result, in which case the Kiwi would fall, he said.

Speizer said a strong Democrat showing would usher in very large fiscal stimulus, which would help the economy, but would also mean more borrowing through the bond market.

Matt Goodson, managing director of Salt Funds, said the best-case scenario would be if the Democrats won the presidency, possibly the Senate, and the House of Representatives.

“The base-case expectation going into this is of a clean sweep.”

But an emphatic win for the Democrats would have contrasting implications for equities.

“The uncertainty, particularly in regard to US trade policy, disappears and there will be expectations of significant fiscal stimulus, which the market will like,” he said.

On the negative side, there would the prospect of the corporate tax rate – slashed by the Trump administration to 21 per cent – would head back up to 28 per cent.

Goodson, who worked as a sharebroker in New York from1997 to 2004, said an outright win for Trump would see the US sharemarket rally as the corporate tax rate would remain low.

Here are the likely scenarios, according to Westpac research:

One: Markets are braced for a Biden win and Democratic Senate control, a scenario that delivers more fiscal stimulus than any other. That more supportive policy outlook saw the yield curve steepen, equities firm and the US dollar sell off as blue wave prospects firmed into mid-Oct. These risk-friendly trends should extend on strong early results for Biden in key battlegrounds. Growing downside risks to the outlook due to expanding virus second waves raise the prospect of an even bigger market reaction to a blue wave.

Two: A status quo outcome tilts the risks toward ongoing stalemate over Covid-19 aid and less fiscal support. If President Trump and Republicans perform well during the vote count we anticipate a risk-off tone – yield curve flattening, lower equities and a higher US dollar. Australian and Asian currencies likely underperform. Trump’s equity-friendly low tax and regulation regime will remain in place but proposals for further tax cuts will not get past a Democratic-led House. US-China tensions are unlikely to subside in this scenario and may well escalate.

Three: A lower probability is attached to a Biden win and continued Republican Senate majority. Even lower chances are attached to a Trump win and a Democratic Senate majority. The hyper-partisan environment ensures strong “coat-tail effects”, meaning down ballot congressional races will tend to go in the same direction as the presidential vote. A Biden win with continued Republican Senate majority likely prompts a setback for risk appetite – lower equities, lower yields and a lift in the US dollar. A smaller Covid relief bill is likely and much of Biden’s ambitious spending plans would be thwarted by a hostile Republican Senate.

Four: In the event of no clear result and an ensuing legal fight, a material decline in asset prices is likely. The S&P500 fell 8 per cent during the 2000 Florida recount between Nov 7 and Dec 15. Treasuries should assume their traditional safe-haven role and the US dollar will likely firm against AUD and other commodity currencies, but should weaken against other majors currencies.

“The longer the outcome remains in dispute, the larger the setback for markets,” Westpacsaid.

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