Weekly market recap: Biden balks at the berating

Following last week's US presidential debate, markets show concern as Trump tests positive for the coronavirus.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 2nd October 2020

In typical Dubai fashion, the Arab state is set to unveil a 105-metre tall water feature in a bid to make the Guinness World Records for the world’s largest fountain. Located at the tip of the Dubai’s famous Palm Jumeirah, the fountain will be spread over an area of 14,000 square feet and will be decorated with over 3,000 lights.

Investors will have been gushing with excitement with last week’s positive market moves following a sharp sell-off the previous week as Covid-19 fears resurfaced. Asset class returns are below; as investors digested last week’s cringe-worthy US presidential debate, concerns were sparked in markets as the President of the United States tested positive for the coronavirus.

Figure 1: Asset class total returns, local currency

Source: Bloomberg, EQ Investors

Figure 2: Asset class total returns, GBP currency

Source: Bloomberg, EQ Investors

With now under one month to go, the race for control of both the White House and the US Senate is intensifying. Though after last week’s election debate, commentators around the world were left less than impressed by the two candidates, who resorted to talking over one another and ignoring the moderator. Nevertheless, President Trump’s failure to land a knockout blow during the debate has led to a surge in the election odds for Joe Biden, which has been accelerated by the news that the incumbent president has tested positive for coronavirus. The spike in electoral odds for the Democrats is also visible for the Senate elections which are scheduled for the same day as the presidential election. The importance for the Democrats in securing the Senate cannot be overstated as a Democrat-controlled Congress would be able to overrule the president’s veto for legislation and control the confirmation of any further appointments to the US Supreme Court.

 

Figure 3: Since securing the nomination, Biden’s electoral odds have rocketed to surpass the incumbent president Figure 4: Key to the Democrats being able to pass legislation will be whether they can also secure the Senate in next month’s election
Source: PredictIt Source: PredictIt

 

From the market’s perspective, the most direct consequence of the Democrats taking control of both the White House and Congress would be the potential for an unwind of the Trump administration’s corporate tax reform. While this would not be immediate – The Tax Cuts and Jobs Act 2017 for example didn’t come into effect until 1 January 2018, a whole year after President Trump took office – any rise in the corporate tax rate is likely to impact investor sentiment and will likely result in a fall in forward earnings expectations. That said, the Democrats have several pro-growth policies they are likely to enact such as Biden’s $2 trillion climate plan which could significantly boost areas of the US economy related to Clean Technologies.

While the US election is significant, we must also remember that there are numerous other factors that need to be considered when looking at the US equity market. These range from the status of a vaccine (there are currently several drugs undergoing phase 3 trials), the path to economic recovery (leading indicators around the world are showing that there has been a slow down following a sharp recovery – see chart below), and policy emerging from the US Federal Reserve (there have been commitments to low interest rates for the foreseeable future).

 

Figure 5: Economic surprise (i.e. the magnitude with which data releases beat expectations) has fallen from its peak in recent months, though it still remains positive
Source: Citi, Bloomberg

 

STAT OF THE WEEK: 25 – the number of times Chris Wallace asked Donald Trump to stop interrupting Joe Biden during the US presidential debate last week (Slate).

DATA CORRECT AS AT: 02/10/2020

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Tertius Bonnin

Tertius joined EQ in 2016 and is responsible for covering investment ideas within US, Global and Thematic equities. He sits on the fund selection committee and also supports the portfolio managers across a range of other responsibilities.

He passed Level I of the CFA exam in 2018, holds the Investment Management Certificate and has a BA in Business with Finance. He enjoys a variety of sports including skiing, cycling and running – and when not in the office he experiments with Asian cuisine.

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