US equities surge despite, or because of, close election result. Biden likely to win, but Senate too close to call. US Treasuries cheer prospect of less out-of-control spending/debt. NZD volatile but flat at 0.67; mild USD weakness

The market has taken the close US election results and associated uncertainty in its stride, with US equities surging ahead and currency markets unperturbed. The Treasury market has cheered the lack of a blue wave with its associated spend and borrow implications, seeing the 10-year rate down 12bps for the day to 0.78%.

The full US election results are still unknown and it might take a few more days to tally the results, or longer if recounts are involved to get a final outcome. Biden leads Trump 238-213 in the bid to get 270 electoral college votes, with five battleground states – MI, PA, WI, GA and NC – still up for grabs, although Biden now leads the count in some of those and the bias of postal votes also favours him. Biden is odds-on about 80% to take the prize, according to betting sites, with a much easier path to victory than Trump from here.  The Senate race is currently tied 47-47, with a couple of toss-ups and a special run-off in Georgia on 5 January, so that race remains too close to call.

Despite the lack of a result and Trump’s threat to roll in the lawyers to dispute the outcome, markets are seeing the result in a positive light. As we noted yesterday, gridlock isn’t necessarily a bad thing and from an economic perspective is better for the medium-term outlook. Any forthcoming stimulus is likely to be more targeted in nature, and a much-reduced quantum means less borrowing and less need for monetary financing of that debt – positive for US Treasuries and less negative for the USD. On the topic of fiscal stimulus, the Senate’s McConnell said “we need to do a stimulus bill before the end of the year”, a positive sign as the Senate majority leader was a key proponent of stalling the process before the election.

For the equity market, while a near-term fiscal sugar rush no longer seems imminent, there is also less chance of a roll back of Trump’s tax cuts and less regulatory risk overhanging the market. The S&P500 is currently up some 3½%, led by Health Care, Communication Services, IT and and Consumer Discretionary sectors. Big Tech stocks have outperformed and the Nasdaq index is up closer to 4½%.

US Treasuries have been on a wild ride, up to a fresh high of 0.94% as the first election results started rolling in and the market fearing a “blue wave”, but as it became clearer that the race was much closer for the Presidency and the Senate, yields began to tumble and they fell further overnight, currently down 12bps for the day to 0.78%. The much flatter yield curve has seen Financial stocks significantly underperform, barely higher against the strong rally elsewhere.

In currency markets, relative to this time yesterday, the USD is generally weaker, but movements have been small, excluding the Scandis, all within 0.3%. The NZD is flat at 0.6700 after traversing a wide 0.6614-0.6744 range during the early counting of results.  If we take the NZ market close as a reference point, there is more noticeable evident weakness in the USD.

The NZD is generally weaker on the crosses. The AUD pushed up through 0.72 during early counting, fell to 0.7050 and has recovered to nearly 0.72 again. NZD/AUD has pushed down to 0.9315, with plenty more downside left in the tank to reverse its recent strong and unjustified rally.

GBP is on the soft side near 1.3000, underperforming the other majors, with EU Chief negotiator Barnier saying, according to diplomatic sources, that UK-EU trade talks are showing only limited progress on key issues after six straight days of discussions, and he was cautious over the prospects of a deal in coming days.

In overnight economic news, both the US ADP private payrolls and US ISM services indicators undershot market expectations. The ISM fell to its lowest level in five months and looks vulnerable to further falls, as COVID19 spreads across the US, disproportionately affecting the services sectors as tighter restrictions take force. The ADP report points to slowing employment growth. In a few weeks’ time, the US election will be far from our minds and the market will be focused on the out-of-control COVID19 spread in the US and associated negative economic implications.

NZ labour market data were in line with market expectations, showing a significant deterioration in Q3, with falling employment and a rise in the unemployment rate to 5.3%, a near four-year high. Still, the data were better than we feared and much better than RBNZ expectations of 7.0% and a forecast that was as high as 9.0% back in May – indicative of the strong rebound in economic activity of late. While the RBNZ will be focused on the medium-term outlook, which still looks soft for inflation and the labour market, there is enough evidence to suggest that the RBNZ’s modelled “unconstrained” cash rate track should be less negative than in the August MPS.

The domestic rates market saw upward pressure across the curve, given prevailing global forces, but this should reverse on the open. Since the NZ close, Australian 10-year bond futures have rallied about 5bps and the US 10-year rate is down about 7bps. The next focus for the market will be next week’s RBNZ MPS, which is shaping up to be a key policy update, with regards to the RBNZ’s prevailing enthusiasm to take the OCR negative next year.

Today, on the economic calendar the early read for the November ANZ NZ business outlook survey is out this afternoon, where we’ll be looking to see whether activity indicators can build on their recent gains. The Bank of England is widely expected to upscale its QE programme by £100b at its policy meeting overnight, whilst leaving its policy rate at 0.1%. But the market’s focus over the near term will remain on the incoming US election results.