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CROSS ASSET WEEKLY
16.10.2020

Market implications of the US election

Summary
Cross asset weekly pic
With less less than three weeks to go until the US presidential election, investors have started to price in a victory for Joe Biden. Interestingly, equity markets have shifted from rising on Trump support to rising on Biden support. This perhaps also reflects an expectation that Democrats will regain the majority in the Senate. Under such as scenario, a new large fiscal package should accelerate the economic recovery, with planned tax hikes probably coming only later during the mandate, once the expansion is on a solid footing.
The increase in US bond yields that we currently forecast, should be slightly more pronounced in case of a Democratic sweep. The Fed will be happy to see a moderate increase in nominal yields and curve steepness along with rising inflation expectations, but will want to keep real yields low in order to maintain loose financial conditions. The dollar downward trend that we are currently forecasting, should also pick up some speed under a Democratic sweep, reflecting a widening US current account deficit.
We expect a Democratic sweep to be tactically positive for equities. A front-loaded fiscal stimulus implies 5% to 6% upside to 2021 earnings. In the subsequent years, the fiscal impact on earnings will largely be offset by higher corporate tax rates. On a sector level, we would retain our tactically cyclical bias, given the potential upside for inflation expectations. Structurally, utilities geared towards renewables and grid operators should benefit from the stated aim of a pollution-free power sector by 2035.

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