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Fading expectations of a decisive victory in Joe Biden’s presidential election have boosted bonds and raised the dollar as a set of operations based on a “blue wave” Democratic sweep of the White House and Congress stumbled.
Investors had raised the stakes in recent days that the decisive wins by Democrats in line with opinion polls leading up to the vote would spark another round of stimulus for the pandemic-ravaged US economy.
Biden can still take the presidency in this close race. But Donald Trump’s victories in Florida and Ohio undermined investors’ expectations of a big victory for Democrats. Strong performance by Republicans in various battle states led money managers to brace for the prospect that the outcome would remain uncertain for days and that the United States could be left with a divided government, complicating investment prospects.
“The ‘blue wave’ trading has been going on since the summer and has accumulated more recently, and I hope it will unravel now. But beyond that, trading the result in this environment doesn’t make sense, ”said Fabiana Fedeli, global director of fundamental equities at Robeco.
“In the short term, I think we are left out,” he added, emphasizing that the economic stimulus and the path of the coronavirus pandemic are much more important drivers for markets than the outcome of the elections alone.
The 10-year Treasury yield briefly eclipsed 0.9 percent Tuesday night, hitting the highest level since June, in anticipation that a big Democratic win could skyrocket government spending and potentially inflation. In turn, this was expected to put more downward pressure on longer-term bond prices and yields to rise.
But yields fell back to 0.8 percent on Wednesday morning, reflecting how badly fund managers had been trapped. “Markets need to take a serious look at their systems,” said Didier Saint-Georges, head of portfolio advisers at French investment house Carmignac.
The dollar also strengthened along with gains on Treasuries, rising 0.4% against the euro and 0.4% against the Japanese yen.
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Futures for US stocks were volatile. Those who followed the top-line S&P 500 Index were up 0.7 percent in European trading on Wednesday, having been about 2 percent higher overnight.
Futures that track the Nasdaq 100 index, which is heavily skewed toward large U.S. tech groups, rose more than 2 percent, after pausing briefly after a rapid rise at one point Tuesday night. European stocks were generally lower, with the regional Stoxx 600 down 0.2 percent.
“Futures markets are pricing in a Trump win, which I think is a bit premature,” said David Bailin, chief investment officer at Citi Private Bank.
The president injected more uncertainty early Wednesday after he vowed to go to the Supreme Court to stop the vote counting while falsely claiming victory in the White House race.
“In the next few days there will be a very complicated news flow,” Saint-Georges said in Carmignac.
Additional reporting by Laurence Fletcher in London and Leo Lewis in Tokyo
