Market Overview – 20/10/2020

An increasing number of Covid infections proved to be negative for European stock markets last week, with new restrictions on activity being applied in many countries. By contrast, the US managed a modest rise in share prices, with the focus still on the forthcoming election. The possible permutation of outcomes is tough to model, but markets will most certainly prefer an outright winner, rather than a contested result. At present, Joe Biden seems to have a comfortable lead over Donald Trump, but history tells us that the fate of the stock market is less about whether the president is a Democrat or a Republican and more about how the economy performs under their oversight.

One of the interesting things to watch out for is whether a Biden win would lead to a reset of foreign policy and a de-emphasising of the “America first” strategy adopted by Trump. Biden has stated that he would take the US back into the Paris Agreement on climate change and rejoin the World Health Organisation. Of crucial importance would be the Administration’s stance towards China. Would, for example, the US roll back on the trade wars with China in exchange for a tougher climate deal? China’s importance in this should not be underestimated. The economic dislocation caused by coronavirus suggests that the GDP gap between the US and China could narrow by 12% for 2020-21. Previous estimates were for China to overtake the US within ten years in terms of economic output. This could now be closer to seven. Whoever is president for the next four years will be acutely conscious of this when framing policy.