29 October 2020

Waiting for the Blue Wave

Our own Footsie index has been struggling of late. A six-month low was struck as investors went into a risk-off mode as fears grew of the economic damage that was being wrought by the pandemic.

Given that the second wave of the pandemic is building up a head of steam and our departure from the European Union is rushing towards us without a trade deal in sight, it is little wonder that investors are feeling a tad nervous. Indeed, it is arguably remarkable that shares have held up as well as they have.

Perhaps this is because it has not all been bad news. By and large companies reporting third quarter figures have tended to surprise on the upside. Both BP and HSBC reported profits recently which were reasonably well received by the market. These, along with many other companies, are having a tough time of it. The oil giant is trying to transform its business in the wake of falling demand, while Britain’s largest bank saw its profits dip by more than a third. Even so, both companies saw their shares rise in early trading after their results were announced, though fears of an even more severe lock down saw these gains evaporate.

However, it is to the other side of the pond that we need to be looking for guidance on what markets might have in store in the shorter term. The US Presidential election is less than a week away and it is the outcome there that will set the tone. It is not just who sits in the Oval Office that is up for grabs. Control of both the Senate and the House of Representatives could change next week. What is more, we may not even learn the final result for a little while if the Presidential race is tight and Democrats gain control of Congress.

It confuses me that the political colours in the US are effectively the reverse of what applies in this country. Democrats are blue, Republicans red, yet it must be clear to all that follow American politics that Democrats sit to the left of the Republican party. The expectation is for Joe Biden to secure a majority of the popular vote, but so arcane is the system of appointing the President that Donald Trump could still prevail – or at least lose by such a slim margin that he refuses to hand over power.

And if the Democrats do indeed seize control of both houses, they could institute measures to emasculate the President, in much the same way that the Supreme Court has been pushed further to the right by Mr Trump. It could all serve to deepen the divide in what is already a divided nation. The outcome could have implications for the nature of any further measures introduced by the Federal Reserve Bank to help boost the economy there. While China continues to make up ground in the post-pandemic world, the US remains the world’s largest economy, so what happens there is of great importance. We certainly live in interesting times.

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