Back to listingWealth Panel Insights 7
November 2020
Counting continues for the US elections, but FOMC will likely be the least exciting headline
The day after the US elections has not brought full clarity as counting continues. The twists and turns have kept financial markets on edge, but the fading prospects of a Blue Wave may have some market implications in the near-term. If Biden becomes president but the Senate is retained by the Republicans, then policy gridlock is most likely. This may mean a smaller fiscal stimulus package, which explains why UST bonds have rallied with the 10-year bond yield back down below 80bps as excessive funding concerns subside. However, with a potential lame-duck Congress in the interim coupled with Trump threatening legal challenges on mail-in fraud allegations, a degree of uncertainty may persist on beyond the week.
Nevertheless, financial markets are always forward looking. Investors are already trying to divine what a divided Congress may mean – if Biden may have difficulty getting free rein to pass his corporate tax hikes and tighten regulation for high-tech, this would be good for the stock market as a whole, which explains the stock market rally overnight. On the flip side, a smaller fiscal package could mean that monetary policy and the Fed would have to step up to fill the gap. While the Fed is likely to hold off any immediate easing action for now, it probably would be willing to at least consider an increase in its bond purchase program if push comes to shove, similar to what the Bank of England is likely to widely expected to do in short order later today. As such, Fed chair Powell is unlikely to deviate from his familiar script of being ready to do more if necessary even as he is probably reluctant to commit himself on a pre-set path or be drawn into the political debate. These factors combined, are likely to mean that the risk rally is unlikely to run out of steam just yet. So buckle your seatbelts and trade on.
Today’s FOMC meeting is likely to be the least exciting headline amid the ongoing US political drama. Front-end rates and bond yields should remain anchored even as the back-end bond yields whip around. As articulated previously, a 1% handle for the 10-year UST yield is unlikely in the near-term given the rising global Covid cases with nary a prospect of a vaccine in short-order, coupled with the fact that interest differentials favour the US when other G-7 counterparts are significantly lower.
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