The Banking Mayhem Continues
With Credit Suisse rescued, attentions switched to Deutsche Bank whose shares fell last week. Its CDS spiked to over 2.20% amid stability worries.
The market is preparing for a Biden presidency. While it is likely there will be recounts in certain states, the margin of victory should be sufficient to render any recounts ineffectual for changing who holds the White House. In the Senate, the race is slightly more ambiguous. At the time of writing, the Republicans and Democrats have 48 seats apiece. If Biden takes the White House, the Democrats will need 50 seats to control the Senate, and it is looking increasingly likely that the two Georgia seats may go to a run-off on 5 January 2021. Therefore, it may be the case that we do not know the configuration of the Senate for a couple of months.
The logic seems to be that a divided government under a “normal” president will deliver more consistent economic policies at the executive level, but will lack the ability to legislate large changes in tax and spending policies. There is also a view that there will be less regulatory risk for the Big Tech stocks which, as a group, rose 5.5% on Wednesday. Finally, with a potentially divided government, the Federal Reserve will have to do the heavy lifting and - as bond yields have fallen so much this week - long duration equities, such as Big Tech, have outperformed.
There always remains the possibility of legal challenges from President Trump. If these do occur, and are credible, the market may see some uncertainty. However, despite the posturing of Trump, the chances of this are currently lower than before the election. For context, in the contested election of 2000, the US stock market fell 7% in the three-week period after election night. It could simply be the case that hedge funds were bracing for a contested election and, with the likelihood of that receding, we may have simply seen short covering driving the market higher.
This week also saw AstraZeneca reports its quarterly earnings. In an interview with Bloomberg TV, the CEO stated that he hoped the large-scale vaccinations would be starting as early as January 2021, or possibly even December 2020. The stock was up 7% on Wednesday and 10% on the week.
Markets are currently trying to solve three things. First, the arrival of a vaccine which is considered to be a positive. Second, the outcome of the US election, which looks to be marginally positive based on the initial market response. Finally, the likely slowdown in US and Europe given the most recent surge in COVID-19. On balance, while the markets might take fright at the likely economic slowdown in the short-term, the longer-term outlook is still positive and so the case for holding a meaningful allocation to equities remains intact.