The outcome of the US election remains uncertain. Photo / NZ Herald
Uncertainty pervaded the financial markets as the result of the US presidential election remained in the balance.
While Democrat candidate Joe Biden stayed in the lead, the markets appeared to be gearing up for gridlock as the Republicans looked to be in control of Senate.
US stocks and government bonds rallied sharply, even though the widely anticipated emphatic win for Democratic presidential candidate Joe Biden failed to materialise.
The rally was mostly driven by big technology stocks.
Capital Economics said that while the election proved much closer than polls had predicted, the impact on financial markets so far had been limited compared to the volatility that followed the surprise 2016 result, which brought President Donald Trump to power.
"Of course, that may still change, especially if the outcome is contested and ends up in the courts. But for now, the main takeaway appears to be that whoever wins the presidency probably faces continued gridlock in Congress," Capital Economics said in a commentary.
While Biden's chances appear to have improved, Trump is yet to concede.
"One thing that is clear, however, is that there will not be a 'Blue Wave' landslide win for Joe Biden and the Democrats," it said.
The Democrats have retained control of the House of Representatives, but the most they can hope for in the Senate is a small majority.
Meanwhile, the US dollar rallied on election night as Trump's chances improved but fell back as Biden's perceived odds recovered.
In addition to the prospect for fiscal stimulus and the uncertainty around the election outcome, a key factor for currency markets is that a second term for Trump would increase the risks around US trade policy, which are especially significant for the Chinese renminbi and other Asian currencies.
Craigs Investment Partners head of private wealth research, Mark Lister, said a divided Congress would be frustrating for Biden, as it would limit his ability to push on with major changes.
"For financial markets, gridlock is good," Lister said.
"It means we won't see dramatic change, which lessens the uncertainty of major policy shifts.
"This means we probably won't see the significant, debt-fuelled fiscal support that the Democrats were hoping for," he said.
"It also makes it much less likely Biden will be able to raise taxes or increase regulation as he'd hoped," Lister said.
Harbour Asset Management portfolio manager Shane Solly said the US government may be gridlocked for years.
"Taxes will not go up. But near-term fiscal risks increase with stimulus likely to be at the lower end of expectations," he said.
The New Zealand dollar traded in a big range yesterday when results started coming in, but the currency appeared to settle at around US67c this morning.
"Markets appear to just want certainty at this point – clarity, irrespective of the candidate, is positive for risk," Kiwibank said.
"The US election will continue to dominate sentiment today. The volatility train should keep chugging."
The New Zealand sharemarket, which opens at 10 am, closed firmer yesterday, the S&P/NZX50 finishing at 12,199, up nearly 70 points.
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