It was always going to be close, but it looks like it could be a number of days before we know the victor in the 2020 US Presidential Election. Donald Trump has declared victory way before he should have done. The race to the White House is by no means done though and Joe Biden could easily still end up being the 46th US President. The reason is that Trump seems to be some way ahead in the votes already counted. However, the postal votes are a critical factor in this election. Trump has always said that he thought these postal votes were open to fraud. It leaves a nightmare scenario where we will not know the ultimate victor of the election for several days and maybe longer.
Around 100m of postal votes have been cast and take a long time to be counted. It means that the key swing states of Wisconsin, Michigan and Pennsylvania remain crucial. Postal votes account for around half the total in these swing states.
It means that although Trump is ahead in these three key states, when the postal votes are counted (which tend to heavily favour Democrats) then these states will be very very close in the coming days.
Donald Trump has come out with an early victory speech in which he using the words “fraud” and “disenfranchised”. He has said that he will go to the Supreme Court and that the vote counts should stop. This is going to be an election that we do not know the result for a number of days. However, there is only one real reason why Trump would be using this tactic, and it is because his team believes that if all votes count, Trump is likely to lose. He will try every trick in the book to prevent this. The Supreme Court is 6-3 weighted in Trump’s favour and if he can get them to rule that late counted votes (especially in Pennsylvania) can be deemed not counted, then he can still win. This process will be acrimonious and bitterly fought. It leaves uncertainty hanging over the election.
For markets this is seems to be bad news for risk, but good news for the dollar (at least for now):
Risk negative – US index futures dropped as Trump was making his “victory” speech. The reason, is uncertainty. With no clear winner and what is likely to be days of bitter words. This is very bad for market sentiment.
Wall Street – Index futures for the S&P 500 (E-mini S&Ps) had already been drifting back through the night as the it became clear that the result would be ever more tight. However, it fell about -1% in the minutes following Trump’s speech).
Dollar positive – this uncertainty is USD positive. That means EUR/USD is likely to move towards testing the 1.1610 September low. If this is broken, it could mean a move towards 1.1500. It is interesting to see EUR/USD actually ticking slightly higher (by c. +20 pips) after Trump’s speech, but if the political turmoil continues, then we would expect EUR/USD lower. This USD strength could last a number of days before we get a clear result now. We still believe that regardless who wins, the months ahead will see USD eventually weakening again, but for now, we expect the path to be towards USD strength over the coming days.
Gold – still moves with a negative correlation with the dollar. USD strength means gold lower. Although EUR/USD has held up well, it is interesting to see gold moving lower since Trump’s speech. Gold may be relatively insulated in the coming days (perhaps regaining some of its safe haven flow) but if the dollar does strengthen, we would expect to see a bias towards $1850/$1860 in the coming days.