MARKETS SPECTATOR: US cliffhanger

The likely winner of the US election will grab all the headlines in the next 48 hours, but with the US fiscal cliff holding sway over market sentiment, a decisive victory either way is essential.

Well it’s finally here. The 57th US election is upon us and will kick off tonight Australian time. For the next 48 hours or longer, this is all we are going to hear about as the result has far reaching implications.

While US citizens head to the polls this evening, we really won’t start to get an idea as to who’s leading until the Australian trading day tomorrow.

The first polls to close will be in six Eastern states at 1100 AEDT tomorrow morning. These states include the first key battleground state of Virginia (13 electoral votes), so this will be the focus early. In 2008, Obama became the first democratic presidential candidate to carry Virginia since 1964 so the focus will be on the turnout in northern Virginia’s Democratic strongholds for an insight into which way the state will fall.

Shortly thereafter at 1130 AEDT, polls close in the all-important Ohio (18 electoral votes) and the highly competitive North Carolina (15 electoral votes). Ohio is expected to be very close so there’s the very real chance the result won’t be known until well after election day. It’s interesting to note that no Republican has won the presidency without Ohio, so this state will be under the microscope.

At midday, voting will cease in the key battleground states of Florida (29 electoral votes) and New Hampshire (4 votes). Whilst polls suggest Florida is leaning towards Romney, it’s worth noting that the democrat-leaning parts of Florida are typically the last places to report. So it’s going to be quite difficult to get a gauge on where Florida sits until most of the counting is complete.

At 1300 AEDT, attention will turn towards the key swing states of Colorado (9 votes) and Wisconsin (10 votes). The Democrats have carried Wisconsin for six straight presidential elections and once again, have the edge in polling going in.

Last but not least, the key battleground states of Iowa (6 votes) and Nevada (6 votes) close for polling at 1400 AEDT.

At this stage, we should be starting to get a reasonable picture as to how the race for the Whitehouse is looking.

Judging by recent price action across interest rate and equities markets, it’s generally accepted that current markets are pricing in an Obama victory. It’s also generally accepted that an Obama victory will result in less of a market reaction to that of a Romney win.

Many have been saying an Obama victory will be good for bonds and negative for stocks. However, any upside move in bonds could be relatively short lived as the removal of uncertainty would buoy equity markets more.

Without getting into the intricacies of each situation, from a markets perspective the best situation is one where it removes a large amount of uncertainty. That is either a decisive Democrat or Republican victory, which would allow the President-elect to then quickly refocus their attention on the looming fiscal cliff.

On the flipside, a low margin victory for Obama could see the market perceive the re-elected President as not having a clear mandate, which would almost certainly be negative for markets.

Taking that to the extreme, a repeat of the contested Bush-Gore election of 2000 would see equity markets sell off significantly. In 2000, the S&P 500 lost 100 points as the legal challenges worked their way through the system.

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The above chart shows how closely this year’s S&P 500 performance has tracked that of an average election year. If we get a relatively decisive victory for either party in the next few days, there’s a very good chance that the correlation could continue into year-end as equity markets reflect the increase in certainty and price in a solution for the fiscal cliff.