Investors Turn Skeptical of U.S. Democrat ‘Blue Wave’ Victory

(Bloomberg) - Markets are growing increasingly skeptical about the chances of a "democratic turn" in the US election in November. And that's bad for almost all asset classes.
As Democrat Joe Biden's polls rose, strategists spoke up about the idea of ​​a "blue wave" where his party would keep control of the House and win the Senate. That outlook could be favorable to the markets as a Biden presidency increases the chances of a new round of fiscal stimulus.
But now analysts say there's a good chance the Senate will stay in Republican hands, making a new barrage of cash less likely to pass through. According to Bloomberg strategist Vince Cignarella, a combination of Republicans keeping control of the Senate or delaying incentives until after the election will hurt economic growth in the first quarter. Add to that the current impasse that leaves little chance of a deal before choosing and you have a recipe for a market downturn.
"Without Fiscal 4, it's all about the dams sweeping the Senate to get a significant package," said Dennis DeBusschere, strategist at Evercore ISI in New York, referring to a fourth round of incentives. "With a 57% probability in the Senate, anything can happen."
Monday's market action looked very much like a “cyclical trade” reversal that relies on a fiscal tide that lifts cyclical stocks and drives inflation. The Nasdaq 100 rose 3.1% on Monday, helped by a 6.4% increase from Apple Inc. and a 4.8% increase from Amazon.com Inc. Growth again outperformed value stocks and big stocks outperformed the small as the dollar rose.
At the same time, Invesco Solar's publicly traded fund fell 3.4% in a sector that would benefit from a Biden presidency. The bond market is showing signs of concern about betting on the reflation trade.
Read more: Bond market reflation bets are exposed to the risk of a divided government
"The movements in Amazon and Apple are enormous and have a significant impact on the Nasdaq 100," said DeBusschere. “And a lot of people pointed out strange activity. But don't underestimate the internal impact of the public finance breakup. "
Not everyone is concerned. RBC economists Tom Porcelli and Jacob Oubina have stated that they are unsure whether further stimulus is needed. This idea was supported by Morgan Stanley strategists like Mike Wilson.
"While additional fiscal support would likely fuel growth and inflation over the next 12 months, we believe it is important to recognize that a strong macro recovery is already well underway," the strategists wrote in a note on Monday. "In addition, that recovery has accelerated without the additional tax support that most (including ourselves) expected a month ago."
Nevertheless, everyone from JPMorgan Chase & Co. to Credit Suisse Group AG has pointed out the possible market-friendly effects of a democratic sweep-driving market.
"Tax incentives = the new QE," Charlie McElligott, cross-asset strategist at Nomura Securities International Inc., wrote in a note on Monday.
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