In a Nail-Biting Battle, Market Rally... 'Tax Hikes and Regulations' Cleared from the Table

[Asia Economy Reporter Seulgina Jo] Despite growing uncertainties and a fierce battle, the market continued its rally. With the Democratic Party's 'Blue Wave' card?securing both the White House and the administration?effectively dashed in the U.S. election, investment funds flowed into tech stocks and government bonds. Investors judged that while the scale of stimulus measures would shrink, the feared possibilities of tax hikes and regulations had diminished. As expectations for the large-scale stimulus anticipated under the Blue Wave waned, U.S. Treasury yields and bank stocks plunged.

Gold futures fell for the first time in four trading days.

◆Tech Stocks Surge as 'Blue Wave' Fizzles

On November 4th (local time), the day after the presidential election, the New York Stock Exchange was led by IT giants such as Facebook (8.3%), Amazon (6.3%), and Alphabet, Google's parent company (6.0%). The Nasdaq index, centered on tech stocks, rose by 3.85%. The Dow Jones Industrial Average (1.34%) and the S&P 500 index (2.20%) also showed rallies.

This sharp rise in tech stocks is analyzed to be due to the Republican Party securing control of the Senate, effectively removing the Blue Wave scenario from the election outcome. Even if Democratic candidate Joe Biden were elected, it would be difficult to enforce regulations on IT companies. This also reaffirmed investors' confidence in IT giants, which have maintained solid performance despite uncertain market conditions. Economic media CNBC interpreted, "Investors have noted that IT giants have consistently served as a 'safe haven' whenever the market fluctuated this year."

With the Republican Party expected to maintain a Senate majority, demand for government bonds also expanded. On this day, the 10-year U.S. Treasury yield, a benchmark for long-term market interest rates, fell by 12.5 basis points (1bp=0.01 percentage point) to 0.773% in the New York bond market. Until the previous day, the 10-year yield had surged to around 0.9%, the highest since June, on expectations that the Democrats would push for large-scale stimulus under the Blue Wave.

Michael De Pass, responsible for U.S. Treasury trading at Citadel Securities, diagnosed, "Until the previous day, the market had assigned a 70% probability to a Democratic landslide, but the unexpected outcome changed the mood." Not only the 2-year notes sensitive to policy rates but also the 30-year bonds fell in succession.

Along with the decline in Treasury yields, major bank stocks also plunged 3-5%. Some regional banks experienced nearly a 10% drop. Gold futures fell for the first time in four trading days. Selling pressure intensified, with December contracts trading 0.7% lower than the previous day at $1,896.2 per ounce. On the New York Mercantile Exchange (NYMEX), December delivery West Texas Intermediate (WTI) crude oil rose 3.96% to $39.15 per barrel.

◆Investors Choose 'Deep Purple'... Analysis: "Tax Hikes Removed from the Table"

Experts analyzed that investors chose 'Deep Purple,' neither Blue Wave nor Red Wave. With the vote count fluctuating, the New York Stock Exchange saw generally reduced trading volume and a strong wait-and-see stance. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as the fear index, had been above 40 at the end of last month, then dropped to 37.13 the day before the election and 29.57 on this day.

Even if Biden is elected president, if the Republicans control the Senate, originally proposed Democratic policies such as tax hikes and IT company regulations will be difficult to implement. Jeremy Siegel, a professor at the Wharton School, said, "The tax increase card has been removed from the table," adding, "The market sees this as 'not too bad'." Mitch McConnell, the U.S. Republican Senate Majority Leader re-elected in Kentucky, emphasized, "A new stimulus package will be passed before the end of the year."

The market views the response to COVID-19 and stimulus measures as the most important variables rather than the chaotic presidential election results. There is also anticipation that the U.S. Federal Reserve (Fed) might take supportive actions at the Federal Open Market Committee (FOMC) meetings scheduled for November 4-5.

On the day after the election, JP Morgan shifted its investment stance on Latin American currencies, which were expected to benefit from stimulus under the Blue Wave, to neutral as the possibility of a Blue Wave weakened. Deutsche Bank assessed that the scenario of a weaker U.S. dollar had become less likely.

However, if the presidential winner is not confirmed even a day after voting ends and disputes such as lawsuits materialize, it would inevitably have a negative impact on the global economy. During the nail-bitingly close 2000 presidential election, which went to the Supreme Court, the U.S. stock market fell by 5% until December 12, when the winner was finally decided. Investment funds flowed into safe assets, pushing gold prices up by 4%, while long-term Treasury yields plunged. Nonetheless, experts acknowledge the negative impact on the market but assess that the situation at that time was not a 'disaster.'

Moody's released a research note on this day stating that the uncertainty surrounding the U.S. presidential election is unlikely to significantly affect credit ratings.

This content was produced with the assistance of AI translation services.