It looks like the outcome will go to the wire.
The vote share for Donald Trump is notably higher than polls had suggested in a number of swing states and while Joe Biden might yet secure the presidency, neither will have scored an emphatic victory.
Markets have reacted with equilibrium, but as Trump threatens litigation, could they destabilise from here?
Blue wave held back
At a time of relatively little certainty, there is perhaps only one conclusion from today: there will be no Democrat clean sweep of the Senate and Presidency.
Even if the Democrats do take hold of the Senate it is likely to be by a relatively small margin given the early results, which will act as a natural check on Biden’s plans.
But, as expected, the Democrats held on to the House of Representatives, so Trump won’t get a free pass for his policies either.
This has prompted an unwinding of the ‘blue wave’ trade.
Jon Adams, portfolio manager at BMO GAM, says: “This has unravelled to some extent and this has been the key takeaway from the US election so far.
“We have seen the US 10-year bond yield drop quite sharply and the Nasdaq was the biggest mover. This is probably because reflation has been taken off the table.”
A Democratic sweep would have made a vast post-covid stimulus package more likely.
Any stimulus package may well have promoted faster economic growth and could have seen a rotation away from the mega-cap growth stocks that have done so well in recent years towards more value and cyclical names.
As is it, Biden – even if he ultimately becomes president – is likely to find the package watered down. This has supported the big technology names in the Nasdaq.
This is also likely to be the reason for a rise in the dollar. The dollar tends to thrive in uncertain times, but it was also likely to come under pressure in the face of a rising fiscal deficit.
The deficit may also rise under a Trump presidency or a Republican senate, but not to the same extent.
Adams says the view coming into the election was that a Republican clean sweep was the best outcome for markets, while a split government – Biden presidency and Republican senate – was likely to be the most damaging.
He said the market had ‘come round’ to a Democratic clean sweep in recent months.
As such, given that split government now looks like the most likely scenario, it is perhaps surprising to see the S&P 500 up on the day.
Adams believes the real winners from this scenario may ultimately be some of non-US regions: “It would remove some of the trade tensions. It could also help small caps as corporate tax rises don’t happen or happen to a lesser extent than currently expected.”
George Lagarias, chief economist at Mazars, agrees that trade will be the most important consideration in the longer term: “As far as markets are concerned, the major consequence of the US election will be on trade.
“Confirmed for a second term, Mr Trump could see this as an affirmation of his trade policies and possibly pursue an even more contentious agenda, which could be negative for both Europe and the emerging markets…
“Conversely, Mr. Biden’s election could be a net positive, especially for emerging markets, as the projection would be for a weaker dollar and less aggressive trade policies.”
There remains the potential for a disputed election. Donald Trump is already threatening to go to the Supreme Court, saying that a ‘major fraud on our nation’ is playing out. He called for states to ‘stop voting’.
The problem appears to be that some votes will arrive over the next two or three days in key swing states such as Michigan, Wisconsin and Pennsylvania. As long as they are post-marked prior to the election day, they should normally be counted, but Trump fears they could give Biden a significant advantage.
Markets don’t appear significantly worried about the potential for legal action. The ‘Vix’ index has dropped in recent days and remained relatively low the day after the elction.
Most of the states in question have clear procedures in place to deal with the problem and it is clear that investors have dismissed many of these legal threats as Trump bluster.
Equally, winning in Nevada, Michigan and Wisconsin would give Biden the electoral college votes he needs to win. He is currently ahead in all three, so late-counted mail-in ballots may not prove a problem.
Political policy paralysis
The one possible sign of nerves is coming from the bond market where falling treasury yields could hint at latent tension in the market.
Phil Milburn, co-manager on the Liontrust Global Fixed Income team believes there is another explanation: “US Treasury yields had been creeping upwards ahead of the election due to the increasing expectation of the fiscal stimulus arising from a blue wave.
“The morning after (US time) and US Treasury yields have moved lower by over 10 basis points.
“Some might say this is a flight-to-quality due to the uncertainty created by a long drawn out legal contest; I’d disagree given that equities are rallying and credit spreads are tightening today.
“Political policy paralysis is frequently a good thing for markets; we are certain that partisanship will block anything not covered by executive privilege,” Milburn added.
A clear result would have been an easier scenario for markets to digest.
However, a result that is slower to emerge is not necessarily bad for markets. If he loses, Trump may make trouble, but markets aren’t worried – yet.