06.10.2020 – Special Report. Historic times in the USA: With the Covid 19 illness of US President Donald Trump, the risks for the stock market have increased even further. For the further course of the presidential election is unclear. There is also a cross connection for China shares. We look at what the event could bring for traders and investors.
Here is the October Surprise
The financial market first took cover when the news about Trump hit: Futures on the Dow Jones plunged by around 500 points and gold rallied. Then investors recovered from the shock. In the end, it looked as if Trump only had mild symptoms and could soon return to the White House. But let’s wait and see – Covid-19 is tricky. In any case, futures on the Dow Jones and S&P 500 rose again at the beginning of the week.
So there we have it, the October Surprise, which we have already discussed at this point. What if the Pandemic Trump should take over after all? Then the election would have to be stopped and postponed because masses of postal voters have already cast their votes. Uncertainty would then have a major impact on Wall Street. But what if Trump recovers? Then a wave of solidarity could strike him – Boris Johnson went through something similar in London. And then the cards will be reshuffled in the election.
JPMorgan plays both sides
And what does this mean for the stock market? Quantum analyst Marko Kolanovic of JPMorgan was one of the first to respond to Corona News. Trump’s illness easily increases Joe Biden’s chances, “which could marginally reduce post-election risks and market uncertainty. However, Trump could also benefit in “a combination of voter sympathy, turnout and an asymptomatic or mild virus outcome boosts Trump’s election chances (e.g. vindicating his strategy of opening by example)”. If the president’s condition worsens, this could even reduce hostility on both sides of the political divide and pave the way for national reconciliation, which would increase the Republicans’ chances in Congress.
Goldman Sachs, by the way, had previously ruled that the best – because most stable – scenario for the stock market would be a split government in which the White House and the Senate are dominated by different parties. “A divided government scenario would lead to a smaller change in interest rates and a reduction in political uncertainty,” wrote David Kostin, Chief Equity Strategist at Goldman Sachs. This would raise the S&P 500 by 11 percent in the short term and bring it to 4,000 by mid 2021. A blue wave, in which the Democrats win the White House, the House of Representatives and the Senate, would bring the SPX to only 3,400 in the short term and 3,800 in the medium term.
Hope for stimuli
But back to JPMorgan. Kolanovic remarked that the most important topic of all is new stimuli. We think: Here, Trump could be the driving force or be slowed down. After all, the bank has judged that “the probability of an early phase 4 stimulus is likely to increase”. In this respect, the outlook for third-quarter results remains constructive and the recovery should continue. In concrete terms: “value will outperform momentum and growth under any election outcome” plus “cyclicals will outperform also under any election outcome. The Bank maintained its year-end target of 3,600 for the S&P 500. In fact, recent developments in the Washington D.C. swamp seem to agree with the JPMorgan expert: Some Democrats hinted that there might be a bailout for the aircraft industry, which supported the market.
The decisive factor is fresh money
Indeed, Bank of America also sees the importance of stimuli. One bearish factor for the market is therefore the global slowdown in central banks and governments. Analyst Barnaby Martin has just made this assessment: Between March and June there were 109 interest rate cuts worldwide. In the following three months there were only 22. In March 2020, there had been more than 1,200 political measures to boost the economy – in August there were only 273. Paradoxically, this leaves only one boost factor for the markets: a new crisis that will bring new interventions.
Anger at China
And now back to Trump. Trump’s anger at China is now likely to rise further because of his personal encounter with the Chinese virus – traders and investors should therefore keep an eye on China shares. After the current pause in the Golden Week, things could get uncomfortable here. Other Republicans are also growing angry with the red rulers. Republican Senator Kelly Loeffler from Georgia tweeted that Beijing must now be held accountable. And campaign manager Blair Brandt from Team Trump said that the “Chinese Communist Party has biologically attacked our President. Republican MP Mark Walker from the House Subcommittee for Intelligence and Counterterterrorism even asked whether this was the goal of China: “is it fair to make the assessment that China has now officially interfered with our election?
The Chinese are visibly nervous at the moment, commented CNN. On Weibo, the Chinese equivalent of Twitter, the state-run television channel CCTV and the People’s Daily newspaper have eliminated the commentary function. The Foreign Ministry wished Trump a speedy recovery.
Focus on the vices
For investors and traders, the fear of big politics remains. In view of Trump’s illness and Joe Biden’s recent lack of mental fitness, the two runners-up are increasingly coming into the limelight. Mike Pence and Kamala Harris will verbally duel each other in Utah on Wednesday. We will keep an eye on the matter – and wish successful trades and investments!
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