LONDON: Europe's stock markets rallied on Tuesday and Wall Street looked set to follow as investors bet on a clear win for Joe Biden as the United States votes in its most polarised presidential election in living memory.
U.S. President Donald Trump and Democratic rival Biden made a last-minute push for votes in battleground states on Monday and though their campaigns were wary of possible legal disputes that could delay a clear outcome, a wave of risk appetite swept through markets.
The pan-European STOXX 600 index rose 1.6per cent in a second day of robust gains, having slumped to a five-month low last week as many of the region's top economies were forced back into almost complete coronavirus lockdowns. Growth-sensitive cyclical sectors such as oil and gas, miners and banks once again led therally - all rising between 2-3.5per cent.
"Markets are pricing for a Biden win, certainly a clear outcome, and they want a clear and uncontested outcome," said Michael Hewson, chief market analyst at CMC Markets.
A shock Trump win, a contested result, or just a divided outcome could all trigger corrections in markets, he said.
"Control of the Senate is crucial for any 'blue wave' scenario to materialise, otherwise divided government continues and fiscal stimulus expectations will need to be scaled back," added Alvin Tan, Asia forex strategist at RBC Capital Markets.
Reassuring earnings from French bank BNP Paribas lifted its shares by 6.5per cent, adding to a sense that the banking sector was holding up relatively well to an economic pounding from the COVID-19 crisis.
But a 40per cent fall in full-year earnings at Associated British Foods due to a profit plunge in its Primark clothing business was a reminder of how the pandemic is wreaking havoc with corporate balance sheets. ABF shares fell 1.7per cent. No major European economic data is due on Tuesday, with only a smattering of earnings to steer investors. BNP bank was buoyed by a surge in currency and commodity trading to beat third quarter profit expectations.
For story on how global markets have fared over the last four years click
Graphic: World stocks market cap rise over last four years - https://fingfx.thomsonreuters.com/gfx/mkt/bdwpkjmoovm/Pastedper cent20imageper cent201604323646730.png
BINARY MARKET MOOD
Analysts said that while the mood was more upbeat on Tuesday, it remained febrile as European countries introduced tougher lockdown restrictions to fight a pandemic that was set to hit the economy further.
Australian's central bank became the latest to take action to shore up the coronavirus-hit economy, trimming interest rates to near zero on Tuesday and ramping up its bond-buying plans.
Investors are also waiting on Federal Reserve and Bank of England meetings this week that are also expected to bring more support.
"The problem with markets is that they are very binary. One day everything is hunky dory and the next day it's the depths of despair and so you have to tread that tightrope between the two that creates volatility," CMC Markets' Hewson said.
The global tone had also helped by gains on a Wall Street on Monday underpinned by U.S. manufacturing activity accelerating more than expected in October.
Wall Street futures were up 1per cent ahead of the start of New York trading. MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS had added 1.4per cent overnight. The gauge is less than 1per cent shy of a 2-1/2 year high struck in mid-October and up over 5per cent this year, driven by a 37per cent rebound from China's markets since March.
Currency markets also seemed to be tilting towards a victory for Biden. The dollar was down almost 0.5per cent against a basket of the world's other top currencies at 93.656 after hitting a month-high on Monday.
Analysts believe a Biden win would weaken the dollar as the former vice-president is expected to spend big on stimulus and to take a freer approach to trade, boosting other currencies at the dollar's expense and potentially pushing up bond yields.
The euro extended gains through the morning to stand 0.5per cent higher at US$1.1645. Sterling went up 0.6per cent to just below US$1.30, while Russia's rouble , which has been one of the currencies hit hardest by the prospects of a Biden win, also saw a strong bounce.
Graphic: Key emerging currencies being split by U.S. election - https://fingfx.thomsonreuters.com/gfx/mkt/qzjpqazmzpx/Pastedper cent20imageper cent201604396878980.png
Strategists at Blackrock Investment Institute said polls were suggesting a greater likelihood of a Democratic sweep in the election.
"We are starting to incorporate themes we believe would outperform in that event, moving toward a more pro-risk stance overall despite last week's market pullback," the strategists said in a report.
South Korea's main index advanced 1.7per cent and Hong Kong's index sprinted 2.2per cent higher. The MSCI China index hit a 23-year high too as Chinese factory activity also expanded the fastest in a decade.
The safe-harbour yen was steady at 104.76 yen per dollar. Japanese markets were closed for a holiday.
The Aussie dollar fell as much as 0.2per cent and Australia's ASX 200 ended 2per cent higher as the central bank trimmed interest rates to near zero and expanded its bond-buying programme, as expected.
Oil prices were clawing higher after two weeks of weakness, with Brent futures up nearly 3per cent at US$40 a barrel again and U.S. WTI up 3.2per cent at US$38.
Gold ticked up 0.2per cent to US$1,894 an ounce, while benchmark U.S. and European bond market yields, which are a proxy for governments' borrowing costs, were also shuffling higher.
"There is an expectation that there will be a Biden victory," said Jan von Gerich, an analyst at Nordea. But he said that there was a "preparedness that there could be some big moves" on Wednesday should the result be unclear.
Graphic: Major world stock indexes over the last four years - https://fingfx.thomsonreuters.com/gfx/mkt/ygdpznlwmpw/Pastedper cent20imageper cent201604338194330.png
(Additional reporting by Marc Jones in London, editing by Nick Macfie and Angus MacSwan)