Huge electoral uncertainty in the US as Trump beats expectations

Chris Scicluna
Election outcome uncertain. Trump calls victory early, says will go to Supreme Court.
Needless to say, the sole focus for markets today is the US elections. Trump has certainly outperformed the pollsters. Indeed, he has declared victory. But that’s premature. The outcome is still too close to call. As of yet, none of the major networks have been prepared to call the result and it is far from clear that an outcome will be able to be called today. With Trump also calling the election “a fraud on the American public” and stating that he will go to the Supreme Court, that venue might well be where the outcome is ultimately decided. Meanwhile, the Republicans have also beaten expectations in the Senate, and seemingly regained a slim majority, an outcome that would impede Biden should he yet eventually manage to win the Presidency.
After polls closed it soon became clear that there would be no overwhelming ‘blue wave’ with the closely-watched key state of Florida – a Democrat target in which votes were counted quickly – favouring Trump. Certain other battleground states, such as Ohio, also decisively went his way. Indeed, at this point, Arizona – with just 11 Electoral College votes – is the only Republican state definitely to have flipped into Democrat hands, while Nebraska’s second district, with just one EC vote, has also turned blue. If all other states then fell as they did in 2016 that would leave Biden with just 244 Electoral College votes, well short of the 270 votes required to become President.
Looking at the other key battlegrounds, at this stage, Trump has a lead in Georgia (and indeed has claimed victory there, although it’s still too soon to call). So, the Presidency looks set to be determined by the outcome of Michigan, Wisconsin and Pennsylvania. Whoever wins two out of three of those states will win the Electoral College. While these appear to have leant towards Trump, the result might be different once the votes – particularly postal votes, which are likely to be disproportionately Democrat – are fully counted. In Pennsylvania, those postal votes will continue to be counted until Friday. But, of course, Trump insists he will go to the Supreme Court to try to invalidate some of them. So, as was always the big fear of the markets, this could become very messy indeed.
As it stands the disappointment for the Democrats extends to the Senate too. While there are still 7 seats to be called – including a run-off election that will be required for one seat in Georgia – to date the Democrats have made only one net gain, with the pick-up of Colorado and Arizona offset by the loss of Alabama. The possible Democrat pick-up of South Carolina has already been called for incumbent Lindsey Graham.
So in summary, the outcome of the election is too close to call, and uncertainty seems set to persist, perhaps for days. Relative to a ‘blue wave’ outcome, a Trump victory could be expected to deliver less regulation and tighter fiscal policy – a policy mix that might be ultimately welcomed by both equity and bond investors alike. But for now, while USTs have certainly rallied, the uncertainty – and likelihood of Supreme Court involvement – has weighed on stocks.
Markets extremely volatile as US election headlines lead to wild swings in predicted outcomes
As to be expected the price action has been very volatile today, responding to the election headlines. Indeed, since counting began, markets have priced all scenarios spanning from a certain Biden win, to a deadlock, to a certain Trump win. US equity futures travelled through a wide range, falling more than 1% as the race appeared tighter than expected but then reversing course to rally more than 3% off the low as incoming results appeared to point to Trump’s re-election, with a Republican controlled Senate to boot. As we write, futures are up less than 1%.
More remarkable has been the volatility in the bond market, with the 10Y Treasury yield initially rising to 0.94% early in the session, only to slump to 0.79% as incoming results made it clear that the election was going to be a lot closer than investors had assessed (and were even lower at one stage). For the same reason, the US dollar index increased over 1% as the risk-on tone emerged, only to oscillate as greater uncertainty emerged.
Turning to markets in Asia, after being closed yesterday, Japanese equity markets have had a strong day with the TOPIX rising 1.2% as the yen weakened against the dollar. Gains were smaller in China (where the services PMI beat expectations), South Korea and Taiwan while equity markets were little changed in Australia and Hong Kong.
China’s services PMI rises, Aussie retail sales surge in Q3, Kiwi jobs weaken
Turning to the rest of the day’s economic news, in China the latest economic report to surprise on the upside was the Caixin services PMI. The headline index increased 2.0pts to 56.8 in October – the highest reading since June and almost 3pts above the historic average for the series. With the manufacturing PMI having also improved in October, the composite PMI increased 1.2pts to 55.7, matching the historic high recorded in June. Elsewhere in Asia, Japan’s monetary base grew 16.3%Y/Y in October, up from 14.3%Y/Y in September, reflecting the BoJ’s increased asset purchases in the wake of the pandemic. In a speech given to local business leaders, which closely followed the material in last week’s Outlook Report, BoJ Governor Kuroda repeated his willingness to take further measures to support the economy if required.
In Australia the final retail sales report for September pointed to a 1.1%M/M decline in spending, compared with the 1.5%M/M decline that had been indicated by the preliminary report. Spending on household goods – which boomed at the onset of the pandemic – fell 3.6%M/M but still increased 16.5%Y/Y. At the other end of the spectrum, spending at cafes and restaurants rebounded 3.5%M/M but was down 15.1%Y/Y. Given the smaller-than-expected decline in spending in September, retail volumes increased a greater-than-expected 6.5%Q/Q in Q3 – far more than reversing the 3.5%Q.Q contraction in Q2 and leaving spending up a solid 4.2%Y/Y. Unsurprisingly, growth was driven by a rebound in spending in sectors heavily impacted by the lockdown (apparel increased 35.5%Q/Q and spending at cafes and restaurants increased 28.1%Q/Q. In other Aussie news, the CBA services PMI index was revised down a negligible 0.1pts to 53.7 in October, leaving it still 2.9pts up from September. As a result, the composite PMI was also revised down 0.1pts to 53.5 – still an above average reading for this index. Meanwhile, the ABS reported that its tax-based measure of payroll jobs declined 0.8% in the fortnight to 17 October, leaving it down 4.4%Y/Y. This continues the slightly weaker trend seen since government payroll support began to be scaled back in late September.
In New Zealand the focus was on the quarterly labour market report for Q3, which will be a key input into the RBNZ’s policy deliberations next week. Employment fell 0.8%Q/Q but remained up 0.2%Y/Y. Combined with a modest lift in labour force participation, this caused the unemployment rate to lift 1.3ppts to 5.3%. This result was in line with market expectations, but considerably better than the very pessimistic forecast made by the RBNZ in August (the Bank had forecast a 2.5%Q/Q slump in employment and a 3.0ppt jump in the unemployment rate to 7.0%). Meanwhile, private labour costs increased 0.4%Q/Q – a subdued increase but one that was slightly firmer than both the market and RBNZ had expected. While today’s release adds to the range of statistics that have proved stronger than the RBNZ had expected, we still expect the RBNZ to launch the well-signalled Funding for Lending Programme. And it would not surprise us to see the RBNZ match the modest cash rate reduction implemented by the RBA this week, to applying marginal additional downward pressure on yields and the exchange rate. This reflects the RBNZ’s stated desire to risk delivering too much stimulus too early, rather than too little too late.
The focus to remain on the US today
Needless to say, most of the focus today will remain on the outcome of the US elections and what this means for markets. However, with two further large event risks still to come in the US this week – tomorrow’s FOMC announcement and Friday’s payrolls report – today’s US data flow will also command some attention. Most interest will centre on the ADP employment report and services ISM for October, which will both cast light on growth in payrolls as well as the broader economy. The full trade balance for September will also be released, with advance data on goods trade already pointing to a sizable narrowing of the deficit during the month.
Services PMIs on the docket in Europe
Today’s European data docket features German new car registrations along with the final services PMIs for October. With hospitality and leisure activity weighed by the resurgence in the pandemic and subsequent decisions to tighten up ‘lockdown’ restrictions, the flash euro area services PMI dropped 1.8pts to a five-month low of highly contractionary 46.2, with risks of a downwards revision today. The Italian indices, to be released for the first time today, are similarly likely to show significant deterioration. The Spanish PMI, just released, dropped 1pt to a very contractionary 41.4. The final UK services PMIs are also due shortly - according to the flash estimates, the headline services activity index fell 3.8pts to 52.3, its weakest level since June.

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