02 November 2020 by jbchevrel
It is hard to name a convincing reason for the rally we have experienced today. This week’s risk event is the election tomorrow, although we also have a FOMC meeting… According to the latest polls (WSJ/NBC), support for Trump and Biden in battleground states has remained unchanged in recent days. The gap seems to remain for Biden. The gap in popular vote polls looks wide. But as in 2016, Trump could potentially benefit from the Electoral College. Projected margins in the tipping-point states are considerably tighter than the margins in the national popular vote. While Biden leads by c10% in national popular vote polls, his lead is seen averaging 5% in Pennsylvania polls, for instance, one of the battleground states. So far the market has been consistently supported by higher Biden victory odds, as the market chose to focus on the fiscal stimulus package which would then come. But this could be undermined in case a Biden win goes along with a Republican Senate. Beyond fiscal stimulus, there are points of Biden’s agenda which will not be positive for Risk, including higher corporate taxes and higher regulations in some sectors. Energy, in particular, represents a higher weight in our market than in S&P 500. And an unfriendly Biden administration (regulations + better relations with Iran + little goodwill to put in an OPEC+ deal) coupled with below-breakeven crude prices (WTI was $33.5 overnight) in the medium term, will likely trigger another wave of credit events in that sector. Finally. In 2016, the market priced Trump as a negative outcome only for hours. Is it possible to see the reverse of this, here? This being against a backdrop of lockdowns in Europe and rising COVID metrics in the US.