‘Layers of uncertainty’: The City braces for a US election unlike any other
It’s been a long year for markets, but today’s US presidential election could be the longest day yet – not least because the results may not be clear for days or even weeks.
Democrat challenger Joe Biden is well ahead in the polls. Yet memories of 2016, when Donald Trump came from behind to take the presidency, loom large over trading floors.
Investors in the City and around the world are bracing themselves for what may turn out to be a highly volatile, contested election. The polls start to close at around midnight UK time, but Alaska doesn’t finish voting until 6am GMT.
Seema Shah, chief strategist at Principal Global Investors, says her plan is “to wake up every now and then and check”.
Usually the City’s trading floors are hives of activity on election night. However, the coronavirus pandemic and the time it will take to count millions of postal votes mean this poll will be more of a slow burner.
Shah says there are “layers of uncertainty”, with possible delays and the fight over Congress key considerations. She says there’s a “sense that we probably won’t know the decision even around this time tomorrow”.
Yet she says that working from home and the Zoom boom “actually makes it far easier this time” to stay in touch with colleagues and clients around the world, “because working remotely is the norm”.
Trading the US election not for the faint-hearted
There will certainly be plenty of brave souls betting on swings in the dollar, stocks and bonds to try to capitalise on the result.
But many in the City say this US election is just too uncertain to take a strong position.
Rupert Thompson, managing director at investment group Kingswood, says he’ll be up early to monitor the results. Yet he admits he doesn’t really know what to expect.
The potential to get “whipsawed” is huge, he says. “It could start off looking Democrat and then move Trump’s way.” Due to all the uncertainty, the “game plan” so far is simply “not to do that much”.
Thompson highlights that surging coronavirus cases in the US mean it is at risk of heading into another lockdown like Europe.
“Do you really want to go overweight risk [assets] now, when possibly in three weeks time the States is going to be facing a similar situation to the UK and Europe?”
Markets fret over contested result
Traders and investors unanimously agree that the worst outcome would be a contested election.
Shah says: “If we’re in a position by tomorrow morning we still don’t know the result, then we would be anticipating a pick up in volatility.”
She adds that if Trump tries to call the election without widespread consensus, “the market is certainly not going to respond too positively”.
Eleanor Creagh, market strategist at Saxo Bank, said in a note to clients that she thinks Biden will win. But she stressed that nothing can be taken for granted.
Unless there is an irrefutable Democratic landslide, “the probability of a contested result remains,” she said.
Spillover for UK and European stocks
Despite the high levels of uncertainty, markets are moving ahead of the big night.
European stocks are up, with investors betting that a convincing Biden victory would lead to a big stimulus package of around $2 trillion (£1.5 trillion). Investors think this would help the global economy.
Analysts have been briefing clients on the possible upsides and downsides for markets for weeks.
For example, Carsten Brzeski, global head of macro at ING, said in a note that there could be “positive spillovers” for Europe from a big Biden stimulus package. He said it would likely focus on infrastructure, climate change and 5G.
“Under a Biden administration, European global players are more likely to benefit from these domestic US investments than under a second term for Trump.”
Shah recommends a relatively novel strategy to deal with the uncertainty: buy huge US tech stocks, as well as the traditional government bonds.
“Having exposure to mega-cap tech, anything which is large balance sheets, positive cash flow, are the ones that are going to be more likely to get through this challenging time.”
However, Shah cautions there will be next to no benefit for UK stocks either way.
“For the UK I think it’s a foregone conclusion. We’re facing Brexit, we’ve got the lockdown. The US election will probably have very very little impact on how that’s going to play out.”