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Goldilocks Scenario for Markets After US Election: Risk Assets to Benefit

Goldilocks Scenario for Markets After US Election: Risk Assets to Benefit

Martin Essex, MSTA, Analyst

US Election, USD price and stock markets:

  • The US Election results, with Democratic Party candidate Joe Biden likely to be the next US President but the Republicans expected to maintain control of the Senate, is arguably the best possible result for the markets.
  • This Goldilocks scenario – not too hot and not too cold – has already lifted stock and government bond prices while weakening the US Dollar, and those trends will likely persist for a while yet.

Stocks and bonds to benefit from US Election, US Dollar to ease

The likely election of the Democratic Party’s Joe Biden to the US Presidency alongside the Republicans maintaining control of the Senate will likely be seen as the ideal combination for global markets, benefiting stock prices, lowering the yield on high-quality sovereign bonds and hitting the safe-haven US Dollar.

While the results have yet to be confirmed, these trends are already in place and will likely persist unless current President Donald Trump succeeds with his legal challenges to the Election outcome, alleging fraud and calling for recounts.

The argument for risk-on trades is based on the idea that some of Biden’s policies on issues such as regulation and tax will be watered down by Congress, which would also curb Government spending. More easing of monetary policy by the Federal Reserve would also be on the cards if the Republicans block a large fiscal stimulus program.

Against this background, the safe-haven US Dollar – a bolt-hole for investors when they seek to avoid riskier assets – has already weakened and may well continue to do so.

US Dollar Index Price Chart, 15-Minute Timeframe (November 4-5, 2020)

Latest US Dollar index price chart.

Source: IG (You can click on it for a larger image)

By contrast, money will likely continue to flow into the stock markets and sovereign bonds. Potentially, the Federal Reserve could throw a spanner into the works by changing its monetary policy settings later Thursday but that is extremely unlikely with the Election results yet to be confirmed. S&P 500 futures are already climbing in Europe and may well continue to do so once the US markets open.

S&P 500 Futures Price Chart, 15-Minute Timeframe (November 4-5, 2020)

Latest S&P 500 price chart.

Source: (You can click on it for a larger image)

We look at currencies and stocks regularly in the DailyFX Trading Global Markets Decoded podcasts that you can find here on Apple or wherever you go for your podcasts

--- Written by Martin Essex, Analyst

Feel free to contact me on Twitter @MartinSEssex

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.