What happens to markets after the U.S choice
About 5-6 weeks ago, global markets turned positive for risk assets with a shorter term. Obviously, this was not a very popular view at the time. Among our reasons, briefly; Our predictions were that the S&P 500 index, which we took as the global risk barometer, had reached the lower point of our reasonable valuation estimate level of 3300-3600, and the US election race, which started to be priced, was tense and expected to be long, gradually reaching a result in favor of the Democrats.
We expected that Wall Street, although more distant from the Democrats, would perceive the election results to be certain in a short time, thus increasing budget expenditures and concentrating on infrastructure investments. We also thought that the bond interest curves would steer due to the significant sector rotation in stocks and the increase in long-term interest rates.
As a matter of fact, this index rose around 10 percent after our comments. Similar increases occurred in many markets, including ours, and yield curves straightened. Of course, with this rise, the upper levels of the band mentioned above were approached. We thought a cautious stance would be more reasonable. Indeed, the S&P 500 index and immediately after, other risky assets began to decline at these levels.
In our comment last week, we stated that when we look at the derivatives markets, we observed that hedging activities against the election results increased with this decline. We stated that despite the fact that Clinton was shown as the favorite in the 2016 elections, the surprise created by Donald Trump’s election as president was effective in this. We also stated that this trend and the pressure in the markets are likely to continue until the elections. As a matter of fact, the pressure in global markets, including our markets, continued last week and the S&P 500 index, which we took as the global risk barometer, dropped below our reasonable valuation estimate level of 3300-3600. Due to this and the views we will convey in a moment, we now think that the downside risk return potential is not attractive in terms of global risk appetite and the upside risk return potential becomes more attractive.
As far as we can see, there does not seem to be a strong market consensus on how and which market will react to the election results in the United States. However, it is possible to make a few predictions for the post-election movements that may occur in the markets. The worst scenario for the US election results and the aftermath for the markets will be that the election result will not be clear for a long time. We think that developments such as re-count calls and taking elections to the courts will cause further pressure on the markets. The diameter and duration of this pressure will develop depending on this process and the events to be experienced.
We continue to think that the other results will not be perceived negatively and that the main movement can be experienced not by the index, but by sector and country rotations. We anticipate that in the case of both net election results, long bond yields will increase and the yield curves will continue to steer. This steepness will be more pronounced, especially if the Democrats take both the presidency and the senate. We think that the election of Joe Biden will result in more positive market results for developing countries in general.
When we consider the details under the main heading of global risk appetite; Although Democrats have plans to increase corporate tax rates, they are highly likely to engage in infrastructure spending, accompanied by a large budget deficit early next year.
We think this situation will be positive for developing countries, especially Asian countries. Although Biden was loaded to China before the election, Chinese markets are among the markets that could be most positively affected by the Democratic victory.
We can see positive reflections in developed country indexes as well. However, the main opportunities there will be formed by sector rotations and appropriate stock selections rather than indices. As a country, Germany, which is an important machinery export to China, may come to the fore.
When we look at the currencies, the Democrats’ clear election victory may seem slightly negative in terms of the dollar. If a controversial picture of the post-election period emerges; It can be expected that the Japanese Yen will show the best performance among the majors.
An important issue that should not be forgotten is; Compatibility or mismatch that may occur between short term market movements and medium term trends.
In this context, a clear election victory for Biden and Democrats; It may cause global inflation, which we consider as a medium term, to increase, gold prices to continue to rise and developing countries to perform better than developed countries. In addition, we think that the global bond rates, especially long-term bonds, will be in line with the trend of rising and steepening of yield curves, this will cause these trends to start earlier and reinforce them further.