Global Economy & Markets Weekly Roundup 27/10/20
Markets have started to price to some extent the likelihood of a "Blue Wave", albeit coronavirus cases remain in focus with just one week away from Election day in the US
Key Takeaways
With just one week away from US Election day (November 3rd), former Vice President Joe Biden clearly leads President Donald Trump in the race for the White House according to national polls, with an average lead of 8.3 points (as of Monday), widening his advantage slightly since the second Presidential debate, albeit remaining below its mid-October high (+10.3 p. on October 11th). However, to win the election, an absolute majority of the Electoral College votes (270 out of 538) is required. Although the general popular vote is important, since only in two elections (2000, 2016) from 1964 the popular vote winner was defeated, the “Swing States” will play the decisive role, due to the winner-take-all approach that almost all states (except Nebraska and Maine) use to award electoral votes.
Having said that, former VP Biden leads in polls of almost all swing states with the exception of Georgia (16 electoral votes) and Ohio (18), in which President Trump leads by a small margin (0.4 pps and 0.6 pps respectively). The most contested states from those in which Biden leads, are Iowa (0.6 pps | 6 votes), North Carolina (1.2 pps | 15), Florida (1.5 pps | 29) and Arizona (2.4 pps | 11). Even if the incumbent President wins all of these states, he will not reach the 270 votes and will have to win one or even two states among Pennsylvania (20), Michigan (16), Wisconsin (10), Minnesota (10) and Nevada (6), where, at the moment, Biden has an advantage larger than 5 pps. Recall that in 2016 elections, Pennsylvania, Michigan and Wisconsin (46 electoral votes combined) voted a Republican for president (by a total margin of c. 80k votes) for the first time since 1988 and gave the victory to President Trump. It should also be noted that almost 65 million ballots have already been cast, with 32% of them in the form of in-person early voting and 68% via by-mail absentee voting. That is circa 47% of the total votes counted in the 2016 general election.
In a similar vein, prediction market-based pricing implies that the Democrats will win the presidential elections and, equally importantly, control the Congress (see graph below). The probability for the so called “Blue Wave” (DDD) has declined a bit since October 7th, albeit remaining very high (56% from 64%). Looking forward, we believe that in the short term, the “Blue Wave” scenario would be positive for risk appetite, as the Democrats will be able to pass a large Covid 19-related fiscal stimulus package to support the economy (CARES 2.0). In the medium- and long-term (fiscal years 2021 – 2030) the proposed Biden plan includes increased tax rates on corporates, capital income and high-income filers, in order to raise $3.4 trillion to finance part of the increase in spending of $5.4 trillion (PWBM data), that would lead to a net spending of $2 trillion or 8% of 2030 GDP (assuming nominal growth rate of +3%).
As far as US equity markets are concerned, the S&P500 declined in the past week by 0.5% (+7.3% YtD), ending a three-week streak with gains, with the progress of the congressional negotiations over a fifth fiscal stimulus package, affecting investors’ sentiment throughout the past week. Moreover, investors weighed the resurgence of Covid-19 new daily cases rising to record highs both in the US and in most European countries, against the positive developments on the vaccine front (Gilead Sciences’ Remdesivir approval by the Food and Drug Administration as a treatment for the coronavirus, AstraZeneca's resumption of its phase-3 vaccine trial in the US). Virus-related concerns led the index down by 1.9% on Monday, with euro area bourses recording significant losses as well (see Markets Section).
Anxiety around the US elections, fiscal stimulus and Covid-19 developments has overshadowed Q3 earnings season in the US. That said, out of 27% of S&P500 companies having reported, 83% have exceeded estimates, well above the 5-year average of 73%. The magnitude of the earnings beats is also significant, as (in aggregate) these companies are reporting earnings that are 17.2% above the estimates (5-year average: +5.6%). S&P500 companies are expected to report a decline in earnings for Q3, amounting to -16.4% yoy from -21% yoy at the start of the season and -31.6% yoy in the previous quarter. Sector-wise, only 2 out of 11 sectors in the index are reporting year-over-year earnings growth [Health Care (+3.8%) and Consumer Staples (+0.9%)], while nine are reporting a year-over-year decline in earnings, led by the Energy sector (-124%), Industrials (-59%) and Consumer Discretionary (-34%). Looking forward, analysts predict that the earnings decline will continue in the Q4, albeit at a slower pace. Overall, for the Full Year (FY) 2020, consensus analysts expect an earnings decline of -16.4% ($133 per share, while for FY 2021 they expect an earnings growth of 24% or $165 per share).