One of the most difficult electoral scenarios in the United States is currently underway, i.e., the lack of a decisive election winner and the possibility for Donald Trump to challenge it. Markets react with increased volatility, but without a clear direction.
Donald Trump has already declared himself an election winner and called for an end to the vote counting. However, according to estimates, it is still too early to be certain of the outcome. On Wednesday morning Joe Biden has more votes, the Senate is in the hands of the Republicans, and the House of Representatives could be ruled by the Democrats. According to Morgan Stanley analysts, such a result would be quite unfavorable for the US dollar and neutral for the stock market. It would also mean problems with pushing through a significant stimulus package for the American economy.
According to MS, the above scenario is the second of the baseline scenarios, and the first is where Democrats take everything. This, in turn, could mean an even greater weakness of the U.S. dollar with the GBP/USD exchange rate going to 1.3800 and the USD/JPY exchange rate going to 103.00. It would also be, according to Morgan Stanley, the best result for the emerging markets and their currencies, including the currencies of our region and the PLN. On the other hand, it could be a negative scenario for the U.S. stock exchange due to increased taxes. In this arrangement, the S&P 500 index could fall to 3100 points, according to MS's note.
At this time of uncertainty, the Japanese Nikkei index is doing very well. Today, it grew by almost 1.8 percent and reached its highest level in nine months. This seems to be related to the good performance of Japanese companies, which reported for the fiscal year ending in March. The head of the Bank of Japan also signaled that the central bank would support companies affected by the coronavirus epidemic.
As expected, increased volatility appeared on the currency market, but without a clear direction. The EUR/USD exchange rate first rose to 1.1760 and then declined to 1.1610. From there, the exchange rate started to rise again to the middle of the 1.1690 fluctuation range. Similar fluctuations with similar results are also observed in the key markets of GBP/USD, USD/CHF or USD/JPY. Also high volatility appeared in pairs with the Polish zloty or Hungarian forint. The zloty in relation to the dollar yesterday strengthened from 3.94 to 3.85, then returned to 3.95 and further decreased to 3.88 zloty.
There are many indications that the final outcome of the US elections may not be known today, which may prolong uncertainty and increased volatility on all asset classes.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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