What does a Biden presidency with no Blue Wave mean for markets?

David A Meier

Joe Biden has overtaken Donald Trump with late wins in Wisconsin and Michigan. The focus now shifts to the Midwest, where wins in Arizona and Nevada would crown Biden as President – legal action pending. As the Senate now seems unlikely to flip, the Democratic Sweep scenario has failed to materialise, and a scenario with a split government is now highly likely.

Day Two after the elections has dawned, and the final results of the three races are still not in yet. In the presidential election, the Democratic candidate appears to have won Wisconsin and Michigan and is now only 17 electoral votes short of winning the presidency. After Trump had won Texas and Florida surprisingly clearly and taken a lead in most other swing states favoured by Republican-heavy election-day voting, the situation changed with the counting of the mail votes that favoured Biden.

As the key swing state of Pennsylvania will most likely go to Trump, the focus for Biden is now in the Midwest, where he is leading in Arizona and Nevada. The electoral votes of these two states would be sufficient for him to win the 270 electoral votes necessary to become President, regardless of the other swing states that remain open, Georgia and North Carolina. The close outcome, now favouring Biden, prompted Trump to question the legitimacy of the count of mail votes, to demand a recount in Wisconsin and Michigan, and attempt to stop the counting in the Midwest. The camping teams are gearing up for a legal battle, and the probability of civil unrest is on the rise. However, we would trust American institutions (courts) to safeguard democracy.

The Senate elections are where the Blue Wave failed to materialise. With the current stand of counting, neither party could so far win an additional Senate seat, with six seats still open.

Preliminary results suggest the Democrats might win in Arizona, but other five seats will likely go to the Republicans. So, the Democrats can solely narrow the gap to the Republican majority to two seats. While the ‘Blue Wave’ has not materialised, the likelihood of a split government has risen, because the possible stalemate in the Senate elections makes the Biden vs Split Congress or the status quo scenarios most likely.

In a first reaction, the US dollar strengthened in reaction to the uncertainty, thanks to its safe haven characteristics, and equity markets began to price out the Democratic Sweep scenario. Beyond these short-term reactions, split governments are not the most favourable outcomes for growth and the US dollar, as they may provide less fiscal support beyond the next coronavirus emergency stimulus.

(David A Meier is Economist with Julius Baer. Views are his own)