SYDNEY (Reuters) – Asian stocks hit an almost three-year high on Thursday and bonds continued their meteoric rally as investors bet the prospect of a US political deadlock would greatly favor some industries while restricting government borrowing .
The risk of a protracted contested election remained, although the count progressed in an orderly fashion, with Democratic challenger Joe Biden narrowly ahead in key states.
“While the official outcome of the US election remains unknown, the odds of a victory for Biden and Republicans retaining control of the Senate are increasingly becoming the most likely outcome,” said Randal Jenneke, portfolio manager at T Rowe Price.
“This outcome is often seen as the ‘golden loop’ scenario for financial markets – no drastic change in policy and the Fed is providing enough liquidity to try and support the economy and financial markets when needed. .
A divided government would limit fiscal stimulus and any “radical policy changes,” which would boost growth stocks such as healthcare, IT and consumer discretionary, Jenneke added.
The largest MSCI index of Asia-Pacific stocks outside of Japan climbed 2% to its highest level since February 2018. Japan’s Nikkei rose 1.7% to a higher high nine months and South Korea 2.4%.
Chinese blue chips gained 1.3%, helped by talks the White House Biden could ease trade war tariffs.
E-Mini futures on the S&P 500 strengthened 0.6% and futures on the NASDAQ 1.4%. EUROSTOXX 50 futures added 0.3% and FTSE futures added 0.25%.
President Donald Trump and Biden both stand a chance of securing 270 electoral college votes as states count the mail-in ballots. Biden remained optimistic about his victory as the Republican president sued and demanded recounts.
(For the latest election results and more coverage click: here)
Betting sites have turned to Biden as results poured in, having previously heavily favored Trump.
Yet the prospects for the Democrats taking the Senate have also faded, indicating a dead end if Biden were to take the White House.
“A victory for Biden without the full support of the Senate means less regulatory risk and increased corporate and personal taxes,” Nomura analysts wrote in a note.
“The reaction of the asset market over the past 24 hours confirms this view, with 10-year US yields falling sharply, and US tech stocks / FMH / structural growth outperforming on the outlook for a less economic aid. “
BONDS WIN BIG
Bond markets assumed that a divided government would greatly reduce the risk of debt-financed stimulus and infrastructure spending next year, and therefore less bond supply.
This saw 10-year Treasury yields fall to 0.74%, after hitting a five-month high of 0.93% at some point on Wednesday.
The 11 basis point overnight drop was the biggest one-day move since the March COVID-19 market panic.
The diminishing chances of a US fiscal stimulus will put pressure on central banks around the world to inject liquidity, just as the Federal Reserve and the Bank of England hold political meetings.
“Both could be interesting given the need for central banks to do more,” said Chris Beauchamp, chief market analyst at IG.
“The Fed in particular will have to resume its role of QE with a weary sigh, perhaps in order to provide yet another bridge to the future when, hopefully, a government stimulus package has been agreed.”
A new focus on easing from the Fed has constrained the dollar, after a mad rush overnight. The dollar index was last at 93.362, much closer to Wednesday’s low of 93.070 than the high of 94.308.
Likewise, the dollar returned to 104.38 yen after briefly hitting 105.32 overnight. The euro held steady at $ 1.1734, a far cry from a low of $ 1.1602.
Sterling had his own issues.
The Bank of England upped its already huge bond-buying stimulus on Thursday by an additional 150 billion pounds ($ 194.61 billion) to a total target of 895 billion, as it sought to amortize the struggling UK economy against the blow of a second coronavirus lockdown.
The Telegraph newspaper previously reported that the BoE was considering switching to negative interest rates.
The pound was down 0.3% to $ 1.2941 from an overnight high of $ 1.3139.
All the talk about easing policies has bottomed gold prices, leaving the metal a firmer hue at $ 1,909.1 an ounce.
Oil prices led to profit taking. They had jumped overnight on speculation that a deadlocked US government would not be able to pass major environmental legislation favoring other forms of energy. [O/R]
U.S. crude slipped 878 cents to $ 38.37 a barrel, although this followed a 4% rise on Wednesday, while Brent futures fell 80 cents to $ 40.43.
Chart – Asian Stock Markets: here
Chart – Asia-Pacific valuations: here