Stock markets higher as presidential transition begins
Stock markets off to another strong start in Europe, with Wall Street poised for a similar open on the bell as Biden’s transition finally gets underway.
I’m not sure we can put today’s rally entirely down to Biden being given access to funding, briefings and everything else that comes with the transition, but it’s probably given these markets an extra nudge in the right direction.
Trump’s attempts to overturn the election result was not the disruptive influence it could have been in the markets. The old adage “markets hate uncertainty” clearly didn’t apply this time. Although the scale of the defeat and trust in US institutions to correctly resolve all disputes in a timely manner may have contributed to the relaxed response.
The delays it has caused Biden’s team in gaining access to what it needs to lead the next phase of the fight against the pandemic and drive the economic recovery following a likely winter setback is not ideal, but not enormously disruptive either. The reaction we’re seeing is probably more relief at the process delivering in the way we all expect it should.
The question now is how much further this rally has to run this year. With so much good news now priced in, including three highly effective vaccines that will likely start being administered before the year is out, are the risks becoming tilted to the downside in the near-term. Could profit-taking and end-of-year portfolio rebalancing take the edge off the market rally?
There are a number of upside risks still for these markets. The Fed and ECB could overdeliver, with both widely expected to announce more easing next month. Congress could surprise us all and reach a compromise on stimulus as the economy slows in response to another Covid surge, forcing new restrictions.
The main downside risk remains Covid itself. Three weeks into the latest lockdown and the UK is turning a corner, so much so that the country will exit lockdown, as planned, at the start of December. The three-tier system will return though, on a stricter basis, with different parts of the country enjoying different freedoms depending on the severity in their area. This wasn’t particularly effective last time and given the time of year, may turn out to be only a brief release before a return to the shackles of lockdown in the new year.
Other countries in Europe are also seeing positive results from the lockdown which may enable more freedoms as we head into the festive period. This is a hugely important time not just for families, but businesses as well, who have a lot of lost ground to make up after a year of lockdowns and restrictions. Many, particularly in the hospitality sector, will just be hoping they can open at all and welcome people in having spent large sums making them Covid safe. Next spring can’t come soon enough!
German third-quarter GDP this morning showed a stronger rebound than anticipated, driven by consumer spending, offering some hope that a fourth-quarter slowdown won’t be as severe as others. Strong exports also support this view and could put the country in a good position in 2021 compared to its peers.
This comes after some strong PMIs from the US on Monday that provides further hope that not only will any economic impact be less severe than feared but they may be better positioned for the recovery.
