Volatility in the financial markets has increased ahead of the US election day on November 3. With the outcome of the presidential race uncertain and with increased postal voting amid the Covid-19 pandemic, the vote counting – and by extension volatility – could continue after election day. That is raising questions about the impact of the election on the US markets in the coming days and weeks.
Check out our latest video in which Capital.com’s chief market strategist, David Jones, uses chart analysis to provide a near-term outlook for the markets based on the possible US election 2020 outcomes.
US election impact on markets: what to expect and when?
The latest presidential election polls show Democratic presidential candidate Joe Biden has a lead over incumbent Republican president Donald Trump. However, it is important to note that polling data in recent elections – such as the 2016 US presidential election and the Brexit vote in the UK – did not accurately predict the outcome, creating additional uncertainty around the US election impact on markets.
Taking the S&P 500 Index of 500 large companies listed on US exchanges as representative of equities, how will the election affect the stock market?
The S&P 500 hit fresh all-time highs in September. A clear win for Biden would give support for a wider-ranging economic rescue package that could give a jolt to the US economy. A less decisive win could make it harder to pass a package.
If President Trump is re-elected, recent volatility could continue and it would likely change little in the market. In the short term, technical trend indicators suggest the S&P 500 could move back up to 3,600 points.
Larry Adam, chief investment officer of the Private Client Group at investment firm Raymond James, predicted: “More volatility is expected in the days to come, no matter which party takes control of Congress and the White House.
An increase in public-sector spending under the Biden Administration could push the value of the US dollar lower, which would be supportive for the gold price. However, if the market remains volatile with Trump remaining president, investors are still likely to buy into the precious metal as a safe haven.
There is a note of caution in that these positive drivers might already have been factored into the gold price reducing the US election impact, but any dips could present buying opportunities as the medium-to-long-term outlook for the commodity remains bullish.
Gold has strong support at $1,840 per ounce and the market has been building recovery in October, stabilising around $1,900 per ounce. The longer-term trend indicates that the market could return to the all-time high above $2,000 per ounce.
Analysts at Canadian bank TD Securities noted earlier: “Considering that a Blue Wave likely offers both a weakening USD and higher long-term rates, gold prices may find some relief in these offsetting forces. Under a split government scenario, it might be more difficult to achieve consensus on a large package and details regarding state aid, which should flatten the yield curve, providing another risk mitigant in this scenario. In the medium term, the balance of risks remains firmly tiled to the upside for gold bugs, as traders may not need to look too far in order to discount these risk mitigants.”
The most widely traded currency pair, EUR/USD, could rise if Biden wins and implements an economic stimulus that would weaken the dollar. However, it is worth noting that the Dollar Index (DXY), which measures the US dollar against a basket of global currencies – has fallen by 9.5 per cent since its late-March rally and could be overdue for a rebound. If Trump is re-elected it could be positive for the dollar, with continued uncertainty driving volatility.
The euro has traded up from 1.06 against the US dollar in March up to 1.20 in early September. There is a clear longer-term trend for the euro at 1.13, with strong support at 1.16, so a dip could present a buying opportunity ahead of a push back up to the highs.
“The EUR/USD supermajor is stuck in a rut and we like approaching trading the pair via options over the US election outcome, as implied volatilities are relatively cheap, given the magnitude of the possible reaction to the US election outcome,” said John Hardy, head of FX strategy at Danish investment bank Saxo Bank.
“Just for perspective, and not a recommendation, a one-month 1.2000 call options costs 55 pips while a one-month 1.1600 put costs 31 pips as of this morning with EUR/USD trading 1.1834. Those 1.1600 and 1.2000 levels are the approximate extent of the current range established since July.”
The crude oil markets are responsive to geopolitical events and the global economic outlook. Prices have been range-bound in recent months after staging a recovery from record negative pricing for US crude in April, but there are suggestions that the market has overestimated the recovery in demand in the aftermath of Covid-19 lockdowns.
Biden has called for a transition away from oil towards clean energy, but as this is a long-term goal, it would be unlikely to have an immediate impact on the oil markets if he were to win the election. And if Trump wins, there is also likely to be no real change in the direction of the commodity’s prices.
The oil markets are likely to be more focused on how the global economic recovery unfolds, with the US election impact on markets remaining limited.
The market for the US benchmark West Texas Intermediate (WTI) crude stabilised over the summer, with strong support at $36 per barrel and resistance at $44 per barrel. The market has been trading within that range between $37 and $41.50 per barrel in October and the trend is set to continue in the short term.
Noting that crude oil prices have been volatile within a relatively narrow trading range for months, Hans van Cleef, senior energy economist at ABN Amro, said that “at the moment, there is little that seems to change this playing field for the oil market”.
However, he added that with oil demand remaining under pressure and supply cut agreements set to expire in the coming months, “OPEC and its partners have some tough discussions ahead of them. The direction of oil prices largely depends on the outcome of these discussions. The high volatility will persist for a while, while the oil price will at most be able to rise slightly.”
Rising volatility alert: how to seize the market opportunities
Are you Team Trump or Team Biden? What is your view, how will the election impact markets?
To provide clients with even more trading opportunities, Capital.com has added six new election-driven indices:
Trump – Make America Great Again (TBIX). The index includes six largest US companies to be positively affected if Trump is elected: Amazon (AMZN), Boeing (BA), CBRE Group Class A (CBRE), Pfizer (PFE), Exxon Mobil (XOM) and Bank of America (BAC).
Trump – Tax Agenda index (TTIX). The index includes six leading US companies to be positively affected by Trump’s tax agenda if he is elected: Amazon (AMZN), Apple (AAPL), AutoNation (AN), AT&T (T), Schlumberger (SLB) and Nordstrom (JWN).
Trump – Favourites index (TMIX). The index represents a diversified portfolio of 10 US companies that belong to four different financial sectors to be positively affected if Trump wins the election: Equinix (EQIX), American Tower (AMT), Jones Lang LaSalle (JLL), JP Morgan (JPM), Jacobs Engineering Group (J), Chevron (CVX), Quanta Services (PWR), Citigroup (C), Wells Fargo (WFC) and Kinder Morgan (KMI).
Biden – Battle for the Soul (BBIX). The index includes six largest US companies to be positively affected if Biden is elected: Tesla (TSLA), Union Pacific (UNP), American Water Works (AWK), Aptiv (APTV), First Solar (FSLR) and Prudential Financial (PRU).
Biden – Trade War index (BTIX). The index includes six leading US companies to be positively affected from Biden’s tax agenda if he is elected: Thermo Fisher (TMO), 3M (MMM), Skyworks Solutions (SWKS), Procter & Gamble (PG), PPG Industries (PPG) and Dick's Sporting (DKS).
Biden – Favourites index (BMIX). The index represents a diversified portfolio of 10 US companies that belong to four different financial sectors to be positively affected if Biden is elected: Tesla (TSLA), SolarEdge Technologies (SEDG), Norfolk Southern (NSC), Union Pacific (UNP), Entergy Corporation (ETR), First Solar (FSLR), Csx (CSX), BorgWarner (BWA), Nio Limited (NIO) and Workhorse (WKHS).
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.