US Presidential Election and Senate: Impact on Financial Markets #17
Market Meditations | September 21, 2020
We cover US presidential election, the latest moves in crypto and highlight all key events to be on the lookout for this week
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Scan of the Week
US Presidential Election and Senate: Impact on Financial Markets
Deutsche and JPMorgan Top Banks Flagged in Fraud Report
Game Changer: Microsoft Buys Elder Scrolls Company ZeniMax for $7.5bn
Trump Says He Will Reveal Supreme Court Nominee by the End of the Week
Over 140,000 Addresses Have Claimed Their 400 Uni Token Airdrops
Stablecoin Dex Curve Kicks off a Dividend on Its CRV Token
New EU Crypto Assets Rules to Be Released by 2024
Becoming a Better Thinker
Scan of the Week
Sept 22. ARDR: Hardfork
Sept 22. DUSK: Provisioner staking goes live
Sept 24. Zcoin (XZC): End of Founder’s Rewards
Sept 28. LISK: Halving
Sept 22. BoE Governor Bailey Speaks on BBC Webinar and Fed Chair Powell Testifies to House Financial Services Panel
Sept 23. UK Manufacturing and Services PMI
Sept 24. BoE Governor Bailey Speaks at Chamber of Commerce Event and Fed Chair Powell And Munchin Testify Before Senate Banking Committee
US Presidential Election and Senate: Impact on Financial Markets
Many investors have turned their attention to the U.S. presidential election in November. Taking a view on the likelihood of success of each candidate and the subsequent policy choices (and therefore ultimately the market impact) is certainly worthwhile. A trickier political equation could be even more important in determining winners and losers in markets: which party controls the Senate. Such is the (lack of) beauty of the US political system.
Many analysts at this point expect the Democratic Party to remain the majority in the House of Representatives regardless of who wins the presidential race. Control of the Senate is harder to predict. Of the 100 seats, 35 are up for election this year and Republicans will be defending 23 of them (with their three-seat majority in balance).
The significance of a Senate majority in the U.S. political system is that it brings the power to block or advance the next president’s agenda. Poll watchers are concerned the makeup of the Senate may not be known for some time after the vote on Nov. 3.
Bloomberg summarises some of the scenarios analysts are investigating to determine how control of the Senate and the presidential outcome could have an impact on financial markets.
Stimulus and Infrastructure
Should the Democrats control the White House, analysts imagine a $2 trillion package that would extend additional unemployment payments while also providing aid to schools, state governments, healthcare and families. It could also be coupled with a job creating program targeted at infrastructure and clean energy. In this case, value stocks tied to the fate of the economy may benefit.
Many investors debate how much of Trump’s tax cuts would remain under a Biden victory. Biden did say he would raise taxes (on those in excess of $400,000 a year) and raise the corporate tax rate from 21% to 28%. The S&P 500 could be one to watch in this scenario. After all, the S&P 500’s 19% rally in 2017 was largely attributed to optimism that Trump’s tax-cut plan would boost earnings in the following year. However, it is simplistic to assume more taxes = lower markets. Markets on average actually have produced better returns and been more consistently positive in years in which taxes have risen. And so, any reactions may be more short term.
Energy policy provides one of the starkest contrasts between Trump and Biden. Biden’s platform includes day one legislation that puts the U.S. on an ‘irreversible path to achieve economy wide net zero emissions no later than 2050’, whereas President Trump is likely to continue policies friendly to the fossil fuel industry. How much good that would be them is unclear given the excess supply and shortage of demand we currently experience. So in terms of the markets: a Trump win could benefit oil and gas stocks while a Biden victory could boost shares of clean energy companies.
Treasuries and Dollar
Strategists at NatWest Markets laid out the various effects they expect in each scenario and the most likely outcome, to which they assign a 40% probability, is a win by Biden and Democratic control of the House and Senate. That, in their view, would lead to a steeper yield curve, higher inflation expectations and a weak dollar amid increased spending on climate and infrastructure programs and the enactment of Biden’s tax plan.
Trading terms: the yield curve. The yield curve simply plots Yields on the Y-axis and Time on the X-axis. The yield of a bond is the rate of interest it provides based on the current market price. Typically, the shape is upward sloping to the right. This is known as the normal yield curve and its shape captures the fact that investors have a liquidity preference (they prefer more liquidity to less). As a result, at shorter maturities, they are willing to accept a lower yield because the bonds are more liquid. On the other hand, as maturity increases, they essentially require a higher yield to compensate for the relatively less liquidity of longer dated bonds.
The next most-likely outcome, which NatWest pegs at a 30% chance, is a win by Trump and a split Congress. If the curve steepened in anticipation of a Democratic sweep, that would likely mean a re-flattening and be a positive for the dollar since Trump would be emboldened to continue his trade war and “America First” policies but reduce the chance for further tax cuts. A Biden win and a split Congress – a 25% probability, according to NatWest – could also see a corrective curve flattening, the strategists wrote.
Only time will tell the outcome but there is plenty of debate already as summarised above and for those who are sharp and proactive, there will surely be trading opportunities.
Deutsche and JPMorgan Top Banks Flagged in Fraud Report. The global financial industry is under the spotlight (again) after a series of leaked documents show years of transactions handled by the world’s largest banks linked to money laundering, corruption and fraud. The report dubbed the FinCEN files, released by the International Consortium of Investigative Journalists and based on leaked documents obtained by BuzzFeed News, said that in some cases the banks kept moving illicit funds after receiving warnings from U.S. officials. Banks moved more than $2 trillion in transfers that their own compliance officers flagged as suspicious in around 2,100 filings. The documents mainly cover payments from 2011 to 2017. The filings analyzed represent just 0.02% of more than 12 million suspicious activity filed over that time. Market impact: HSBC shares reached a 25 year low on Monday, Standard Chartered fell 5% in London trading, while Barclays and Deutsche Bank shares declined more than 8% as investors digested the report and also worried about tighter virus restrictions. Read more.
Game Changer: Microsoft Buys Elder Scrolls Company ZeniMax for $7.5bn. Microsoft will buy ZeniMax Media for $7.5 billion in its biggest video game deal. ZeniMax owns Bethesda, the publisher of popular games such as The Elder Scrolls and Fallout. The company owns several other studies, giving Microsoft’s Xbox business an infusion of major titles. Bethesda has agreed to debut two of its upcoming games on Sony’s PS5 rather than Xbox and it’s unclear how the acquisition will affect that deal. Xbox chief Phil Spencer said: “Like us, Bethesda are passionate believers in building a diverse array of creative experiences, in exploring new game franchises, and in telling stories in bold ways. All of their great work will continue and grow, and we look forward to empowering them with the resources and support of Microsoft to scale their creative visions to more players in new ways for you.” Read more.
Trump Says He Will Reveal Supreme Court Nominee by the End of the Week. Donald Trump on Monday said he would push to install a successor to Ruth Bader Ginsburg before the November election and plans to announce his Supreme Court nominee later this week. The US president said in a ‘Fox & Friends’ interview that he was considering a short list of five candidates for the Supreme Court vacancy left by Ginsburg’s death on Friday. Mr Trump has said he will select a woman. The appointee would be Mr Trump’s third to the Supreme Court and could cement conservative control of the high court with a 6-3 majority, providing an enduring victory for Republicans even if they lose the White House at this election. Read more.
BITCOIN / DOLLAR
$11,200 – Key Resistance
$11,000 – Key Psychological level
$10,400 – Turning Point
$9,200 – Key Structural level. This 0.382 level remains key to our macro bullish bias
Key levels remain the same as in our previous few analyses however there is a clear difference in structure. The market has begun to for a steady series of lower highs (learn more here), this is an early indication that a downtrend is imminent.
ETHEREUM / DOLLAR
$375 – Key Structural Level. Above here I will consider longs again
$357 – Key Resistance. Given current market conditions this i likely to provide us with a great short opportunity
$316 – Danger Zone. Below here heavy drop is probable
Over 140,000 Addresses Have Claimed Their 400 Uni Token Airdrops. After Uniswap’s successful token launch on Friday, around 75% of the claimable UNI tokens (150 million) have been obtained so far. Most claims were made on Friday in the first hours after the launch, congesting the Ethereum blockchain once again and causing transaction fees to rise towards new all-time highs. Price quickly doubled on Saturday after absorbing most of the initial sell-pressure,, and is now trading around $5. The market cap of the UNI token currently sits at ~$590 million with a fully diluted valuation of almost $5 billion. Read more.
Stablecoin Dex Curve Kicks off a Dividend on Its CRV Token. Decentralized exchange (DEX) for stablecoins Curve has introduced a new dividend program for holders of its governance token, CRV. In order to participate in governance, users have to stake their CRV to a special contract and receive special escrow tokens (veCRV) in return. Those tokens started receiving half of all the staking fees on Curve on Saturday, a ‘result of a community-lead proposal to align incentives between liquidity providers and governance participants (veCRV holders).’ Read more.
New EU Crypto Assets Rules to Be Released by 2024. In times of a pandemic that has driven more people to go cashless, the European Union’s approach is part of a broader effort to encourage a shift towards digital finance, according to a Reuters article. The EU will introduce new rules before 2024 to make cross-border payments quicker and cheaper by utilizing blockchain and crypto assets like stablecoins. The EU executive is working on a draft to clarify how existing rules apply to crypto assets and will introduce new rules where there are gaps. With this strategy, Europe continues to look for alternatives to the likes of Mastercard and Visa, the U.S. payments firms heavily used in Europe. Read more.
Becoming a Better Thinker
Entrepreneurship is difficult to teach because original thinking is so hard to teach. Learning how to become a better and independent thinker is not an easy thing to do. As social creatures, we as humans tend to hang out with people who share our opinions and avoid the ones who think differently. We mimic the opinions of those around us instead of reasoning on our own. As Elon Musk so often says, most humans reason by analogy instead of reasoning from first principles. To get better we should start with fundamental truths and reason up from there.
Shane Parrish, founder of Farnam Street, recently shared a snippet where he expands on how we can improve our thinking:
Although uncomfortable, hang out with people who are better thinkers who can challenge your beliefs.
Expose your thought process to open it up to evaluation and feedback.
There is nothing wrong with being right together with the crowd, but there won’t be a big payoff because everyone else is expecting it too. The best thinking is not often the most popular kind of thinking because looking for an edge, whether that is in markets, business or your personal life, requires you to be right and go against the crowd. One way to do this is by learning in public. Sharing your thoughts and ideas online can be so advantageous because you open your ideas to criticism and valuable feedback. Continuously iterating through feedback is how startups become successful businesses. At some level, we can do the same for our thinking.
The good news is that there has never been a better time to hang around people who think differently than you. Social media platforms like Twitter allow us to follow almost anybody in the entire world. Instead of only following people that you tend to agree with, look for people who you respect but disagree with. Look for people who surprise you and present their ideas in ways you haven’t thought about before. Go out and stress-test your beliefs. It’s the proven way to get better at anything you do.