LONDON/NEW YORK: Those who banked on a big U.S. government spending splurge may be disappointed, but two days after Election Day, investors are looking on the bright side: less regulatory tightening than feared and a central bank still in full economic-support mode.
Global stocks extended their surge on Thursday as Democratic challenger Joe Biden edged closer to victory over Donald Trump in the battle for the U.S. presidency, and there was little sign of panic about the possibility of a contested result that may end up in the courts.
Disappointment over massive stimulus appears to have been replaced by relief that without a Democratic sweep of Congress and the White House, potential gridlock between a Biden administration and a Republican Senate would scupper any plans to tighten the screws on large corporations, particularly in the technology sector. A final call on control of the Senate could be up in the air until January.
At the same time, some investors held out hope that even more limited fiscal support could benefit other sectors, such as materials and industrials, whose shares rallied on Thursday. Shares in renewable energy - where Biden has pledged large investment - also surged, reversing steep declines from Wednesday.
"It should not be ignored that even more moderate policy would also be positive for industrials and cyclical recovery plays," said Arnim Holzer, macro and correlation defense strategist at EAB Investment Group in Philadelphia.
The market gyrations of the past 36 hours represent some position unwinding, given the tighter-than-expected race, investors said, but with the U.S. and global backdrop one of abundant liquidity and rock-bottom bond yields, flows into equities and company debt are likely to continue.
(Graphic: Trump timeline - https://graphics.reuters.com/USA-STOCKS/xlbvgwyzmvq/trumptimeline.png)
That is especially so for the mega-tech firms - shares in Apple , Amazon and Alphabet extended Wednesday's rally.
For Jonathan Bell, chief investment officer at Stanhope Capital, the outcome was the best of both worlds.
"Biden being elected increases the chances of a fiscal stimulus deal, but (with a Republican Senate) it also reduces the ability for him to push through significant taxes rise or policies that might constrain the likes of Amazon and Apple," Bell said.
"Tech seems to be thinking that the disruptors, most of which are anti-trust regulations, will not be significant and that the Senate will be able to prevent it."
Similarly, Didier Saint-Georges, managing director at asset manager Carmignac in Paris, noted the positives for pharmaceutical shares.
The election has done little to alter the broadly positive investment backdrop, Saint-Georges said, adding: "Moving from Trump to Biden looks like a revolution but in market terms it may not be that significant."
FED TO THE RESCUE?
Cue central banks.
Their asset-buying largesse has floored yields and volatility in Treasuries, sending U.S. stocks on a sharp upward path. The S&P 500 index has gained some 57per cent from its March lows and is already up 7per cent this week.
The bet now is that any fiscal stimulus shortfall may force the Federal Reserve and peers to pick up the slack. The Bank of England on Thursday announced a bigger-than-expected expansion of its bond-buying scheme.
(Graphic: Central bank balance sheets swell - https://fingfx.thomsonreuters.com/gfx/mkt/xklvymajkvg/Pastedper cent20imageper cent201604589866870.png)
The Federal Reserve kept its loose monetary policy intact on Thursday and pledged again to do whatever it can in coming months to sustain a U.S. economic recovery.
Investors are hoping policymakers might provide some stronger guidance of future help.
"I am not sure the Fed will just abandon (calls for fiscal stimulus) and say 'don't worry we will do the heavy lifting', Carmignac's Saint-Georges said.
"But what can't be done on fiscal will have to be done on the monetary front."
(Graphic: The risks facing the Fed: Jobs The risks facing the Fed: Jobs - https://graphics.reuters.com/USA-FED/ELECTION/oakvenlakpr/chart.png)
(Additional reporting by Susan Mathew in Bangalore, April Joyner, David Randall and Lewis Krauskopf in New York; Editing by Angus MacSwan and Sonya Hepinstall)