Weekly Market Update: Likely Biden Victory Helps Equities to Best Week in Over Six Months

Market Update

Global equities rallied last week with US stocks in particular posting their largest weekly gains since April as investors reacted to the increased possibility of a divided government, with a potential Biden win and continued Republican control of the Senate. In Sterling terms US stocks were up +5.6% while both UK and Global equities were up +6.0%. Japanese equities closed the week at their highest level since 1991, up +4.7%, as the recently reported second-quarter earnings season has delivered a number of strong results from Toyota and other big industrial names, indicating that Japanese businesses have adapted well and quickly to tough conditions. European equities were the best performer in Sterling terms, up +7.7%. Better than expected employment data in the US prompted selling of US Treasuries and sent yields sharply higher, with the US 10-year ending the week at 0.819%. The UK 10-year Gilt yield ended the week at 0.274%. Oil prices rose +2.1% to $38 a barrel. Gold gained +2.2% to $1,960.50 per Troy ounce.

CIO Analysis

Joe Biden’s emergence as the apparent winner of the US election has been the cause of alarm to certain UK observers who feel that this could impede a trade deal with the US. Despite the PM’s very quick congratulatory note to the incoming President, concerns have risen that a trade deal would not be as easy to achieve, given Boris Johnson’s lack of personal rapport with Mr. Biden. Frankly, we believe that particular argument to be a bit simplistic.

It is frankly not plausible that Mr. Biden, who will seek to restore global relationships, will seek to “punish” allies of the previous President. The “special relationship” goes far deeper than contemporary personal relationships, stretching into common ancestry, key alliances, language and culture. The United States has often built its global hegemony on the path trailblazed by Britain. It’s about the sharing of trade links, intelligence and a global visions. Acting as the doorway to Europe was only one – significant – way, in which that relationship bore fruit.

As far as the trade deal itself is concerned, things are less complicated that they seem.

Under Mr. Trump, an “America First” deal would be sought by the US, which already has a trade surplus with the UK and would reasonably seek to expand it, creating a bigger deficit for the UK. It would be quicker and simpler to achieve but, for all the headlines it would generate, it would not necessarily be a great outcome over the longer term.

Under Mr. Biden, a multilateralist, it’s possible that a softer approach might be considered. The US has long sacrificed some growth for influence under previous Presidents to Mr. Trump. Mr. Johnson is not a fundamentalist, if anything he has proven to be extremely flexible.

Talks with the EU will probably now get back on track as the rules of the game coming January are known, and will revolve around a satisfactory solution for the Irish Republic.

We believe that, insofar as Brexit does not threaten the Good Friday Agreement, a truly better deal is possible. In other words, some concessions by the UK to the EU might mean some concessions from the US to the UK. And that’s how multilateralism creates multiple opportunity sets not available to bilateralism.

David Baker, CIO

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