Biden’s ‘blue wave’ is a blue ripple

9th November 2020

Early voting has played a crucial part in Biden’s victory, overturning initial Republican leads in many of the battleground states.

However, the ‘blue wave’ that many expected has turned out to be barely a blue ripple. The Democrats lost seats in the House and have also failed to gain control of the Senate. Mr Biden’s margins of victory were small to say the least, and not remotely a reflection of his apparent lead in the polls in the run-up to the election.

Having nearly lost a second consecutive election to a divisive candidate like President Trump, quite a bit of soul-searching will be required by the Democratic party, including reclaiming the centre. Neither party has managed that feat, with the pattern of voting in the US implying voters are craving just that. Boundary redrawing after the US census means that the Democrats will face a tough task retaining the house in the 2022 midterm elections. The Republicans, however, face the same quandary with the Senate in 2022.

Whichever party reclaims the centre of the American political landscape is likely to be well-placed for gains in 2022, and victory in the 2024 presidential election.

Friday’s non-farm payrolls and unemployment data both outperformed, with non-farm payroll adding 638,000 jobs, and unemployment falling nearly one percent to 6.90%. The sampling used for unemployment likely understates the true unemployment level. Meanwhile, the non-farm payroll concealed a large drop in employment by state governments that cannot be explained away by temporary census workers dropping out.

With Covid-19 cases now rampaging across America in ever-dizzying numbers, improvements in US economic data may start to slow or even stop. That is because, with the election finally in the rearview mirror, further restrictions on movement and socialising now seem inevitable across many states. These restrictions will diminish economic activity ahead of the crucial Thanksgiving and Christmas period.

Nevertheless, the fractures between the Republicans and Democrats on economic doctrine are very much in evidence. Over the weekend Republican Senate Majority Leader Mitch McConnell pointed to the improvement in Friday’s data as a reason to limit any fiscal stimulus to a low number. A Democrat President and House majority, combined with a Republican Senate majority, may lead to a stalemate on many of Biden’s crucial policy efforts. The fiscal stimulus is likely to be the first victim of the new government, which will essentially be a continuation of the status quo with new cast members.

With the fiscal stimulus likely to be off the table, carrying the load of the US economy will fall on the shoulders of the Federal Reserve once again. December’s FOMC meeting is now “live” with new monetary policy initiatives almost certain. Negative interest rates are unlikely to be among them, but bond yields, after having spiked ahead of the election on blue wave expectations, have now reversed and started tracking lower again. Negative bond yields at the short end of the curve cannot be discounted as we head into 2021.

The miraculous arrival of Covid-19 vaccines that could be manufactured in huge volumes quickly, and then distributed widely, could still change that equation before the end of the year. If 2020 has taught us anything, however, it’s that assumptions are perilous, and plans - if there are any - only last as long as the first engagement.

Financial markets have rallied today in the warm afterglow of Biden’s apparent victory. While the US remains divided, the sighs of relief can be heard from the rest of the world, with no polling required. The value of the US Dollar has fallen, notably against pro-cyclical Asian and commodity currencies. Equities are climbing higher, a trend that started last week even before the votes were counted. Commodities are rallying.

It is clear that a huge amount of capital - likely stored as US dollar, Japanese yen and Swiss franc cash - had been waiting on the sidelines until the US elections passed. Markets needed no second-guessing for the floodgates to open and the global recovery trade to return to its pre-election self.

With the Federal Reserve and the European Central Bank both set to ease more in December, the debasement of the US Dollar could well continue into the new year and perhaps much of 2021. In that environment, as investors search for yield in a zero percent interest rate world, equity and commodity asset price inflation may well continue to flourish.

Trump remains US President until Mr Biden is inaugurated, if Biden will be finally confirmed as the election winner. In the meantime, President Trump is perfectly entitled to challenge state and county election results that his campaign deems are unfair, incorrect or fraudulent.

Making accusations, proving accusations and winning in court are all substantial hurdles for Trump’s legal team to overcome though. In the meantime, the typical “lame duck” handover period between administrations may be anything but. There is plenty from the past four years to suggest that Trump may not go quietly, and this could unsettle markets.

Similarly, there will be no instant magic panacea in international relations thanks to a Biden win. Trump is still President, Biden is not. So pursuing a bullish investment strategy predicated on an immediate improvement in US/China relations would be dangerous. Biden himself has said he will continue to be tough on China; how tough is not at all clear right now.

OPEC+ were also muted in their response, saying they would miss their “good friend” Donald Trump. There will be some nervousness in the grouping now if Biden indicates a willingness to engage with Iran and perhaps ease sanctions. Iranian oil hitting international markets is just what OPEC+ and US shale don’t need right now.

On a more positive note, the Biden administration would almost certainly engage diplomatically with Europe in a more civilised way. The US would also likely re-engage in trade treaties that cover Asian/Pacific nations excluding China. That would boost world trade and aid the world's economic recovery, including in the United States.