US Politics: Presidency result likely delayed, but blue wave off the table – Incumbent president Trump is ahead of Joe Biden so far in the presidential election count in the key battleground states, but a much higher proportion of postal voting in this election due to the pandemic appears to be skewing the early count. These mail-in ballots are counted later in many states, and in some crucial states – particularly Pennsylvania and Michigan – it may take days before we have a final result. The effect of mail-in ballots could be enough to swing the election outcome; because president Trump has consistently cast doubt on the validity of these ballots, his own supporters were much more likely to vote in person than Biden supporters. President Trump has already made a statement claiming victory in the election and saying that he would go to the Supreme Court in an attempt to halt the further counting of votes. A disputed outcome is likely to mean increased market volatility, as we have seen this morning in US equity market futures.
Senate has likely failed to flip Democrat – Crucial for the macroeconomic outlook has been whether the Senate – currently controlled by Republicans – would flip Democrat. With a Biden presidency and a Democrat-controlled House, this would have given Democrats the freedom to enact significant spending plans over the coming years. Democrats needed to gain a net four seats to take control of the Senate, but so far they look to have gained just one seat, and two out of the three remaining close races currently favour Republicans. This means Republicans are highly likely to retain their narrow majority in the Senate. Democrats look like they will remain in control of the House, but the race here has been closer than anticipated, and they could end up making a net loss of seats. This means that regardless of the final outcome of the presidential election, the executive looks to remain divided for at least the next two years – until the mid-term elections in 2022. This will make it harder to pass significant stimulus, and deals a blow to Democratic green energy and infrastructure spending plans.
US Treasury yields move lower – The prospect of less aggressive fiscal stimulus given a divided Congress has sent US Treasury yields lower, as markets had started to price in a Blue Wave in the run-up to the elections. We expect the trend of lower yields to continue going forward with the US curve bull flattening on the back of the theme of less fiscal stimulus, aggressive Fed purchases and the prospect that the fed funds rate will remain on hold for many years. A contested election outcome could add to this trend in the near term as well. (Bill Diviney, Nick Kounis and Jolien van den Ende)