Trump or Biden? The most important thing is a clean sweep

This week we saw a big risk sell-off driven (among other things) by the worsening COVID-19 situation in the US and Europe. In Europe, new cases, hospitalisations and deaths continue to rise and in some countries hospitalisations are approaching the levels in spring. Politicians have reacted by tightening restrictions and some countries, even big ones like Germany and France,have imposed partial lockdowns. It is going to be a long winter with risks skewed towards tougher, not looser, restrictions across Europe. We discuss in further detail in COVID-19 Update: Partial lockdowns in Europe, 29 October.

The ECB delivered a dovish message at yesterday’s meeting. With the euro area economy losing momentum faster than the ECB expected and growth risks now clearly tilted to the downside with the deteriorating COVID-19 situation, President Lagarde set the scene for a comprehensive easing package in December.

Next week’s key event is the US Presidential and Congressional elections.Whether we will know the election result already Wednesday morning (as we did four years ago) depends on many factors. If Florida swings to Biden, it seems impossible that Trump willbere-elected and since Florida has already started counting mail votes,officials expect the results to be ready in the early morning hours CET. If the election ismore contested, we may not know the result for several weeks. That said, remember that all disputes must be solved by 8 December. From a market and economic perspective, the most important thing is that we get a clean sweep (i.e. the same party wins the Presidency, the Senate and the House), as it would make it easier to pass another relief package, so in that sense the Congressional election is more important than the Presidential election. We think markets will react positively to a clean sweep, while markets may sell off in case of a divided Congress. We think the most likely outcome is a Democratic clean sweep but it is noteworthy that Trump and the Republicans have rebounded slightly in recent weeks and Biden and Trump are now neck and neck in Florida.

We do not expect the Federal Reserve to send significant new policy signals at its meeting on Wednesday. That said, the Fed’s September forecasts were based on the expectation of another relief package, which has not arrived yet, and aswith the ECB, there is increasing pressure on the Fed to do more. Based on recent Fed speeches and the Fed’s signal at the September meeting, we think the Fed will stick to its game plan that it ison hold for a long time.

Besides that,we get Chinese PMIs on Saturday (the official ones) and on Monday (the private ones). We expect the PMIs toremain in expansionary territory, as China is not burdened by new flaring up of the virus like Europe and the US. In Europe, focus is on COVID-19 restrictions, but we also look forward to the EU Commission forecasts on Thursday. In Japan, we will look out for a fresh stimulus package from the government expected next week.

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