No Surrender

US equities stormed higher for a fourth day Thursday, bringing gains on the week to more than 7% on the S&P.

Donald Trump’s fight to keep control of The White House felt more desperate. The president delivered multiple all-caps tweets demanding the stoppage of vote counts and alleging fraud. As is now customary, a good portion of his tweets were flagged by Twitter as misleading. Trump is suing in multiple locales, so far with not much success. Georgia appears headed for a recount, and, notably, the state could have two runoffs in January for Senate seats.

In short, the market continued to project a Biden presidency with a GOP Senate, and that still looked like the most likely outcome. But nothing is certain just yet. The balance of power in the Senate may not be known for months. Still, it’s important to note that Democrats underperformed this week, both in Senate and House races. So the market is likely to keep trading the “blue fade” even as a “blue revival” narrative got a bit of traction Thursday.

This is shaping up to be the best week for equities since the manic days following the March panic. Big-cap tech is now up more than 9% and could conceivably post its biggest weekly gain of 2020 (figure above).

Do note that the Russell 2000 actually managed to outperform big tech Thursday. Some cited the “blue revival” narrative for that reversal, but you could just as easily argue it was a catchup from Wednesday, when small-caps underperformed by some ~400bps.

Partly due to the notion that a “blue wave” isn’t totally out of the question and partly because the mood was risk-on, Treasurys unwound early bull flattening to trade mixed Thursday.

“The ability of the US rates market to stabilize so quickly following the massive bull flattening has galvanized our bearish leaning once the election results are finalized,” BMO’s Ian Lyngen, Ben Jeffery, and Jon Hill wrote, adding that adherence to what is by now a well-worn range is “the path of least resistance.” There was virtually no reaction to the FOMC statement or to Jerome Powell’s press conference.

The dollar, meanwhile, is squarely on the back foot. Thursday was especially bad (or “good” depending on how you want to look at things given that the world is a much friendlier place when the dollar is weaker) with the greenback shedding 0.9%. It’s down ~1.6% on the week.

When the post-election equity surge will run out of steam is anyone’s guess. Trump is still sticking with a litigation-based strategy for staying in the Oval Office, but it seems unlikely to work. Biden needed just one more key victory as of Thursday evening, assuming all earlier called states remain blue.

The obvious question that nobody is asking just yet is what Trump’s next move would be if he doesn’t manage to either pull off a come-from-behind miracle or somehow “win” through the courts. An outright concession still seems very unlikely as it would be anathema to his personality.

From a mechanical, flows perspective, Nomura’s Charlie McElligott wrote that “the Equities Vol space is still pricing significant downside risk and overall risk premium remains ‘high’.” He continued, writing that “to me, that is still where we can get this extra vol-complex ‘sling-shot’ flow which then feeds into expiry and then into [a] year-end melt-up, especially as second-order ‘Vol Control’ systematic re-leveraging kicks-in.”

All anyone can do on the election front is wait. It seems likely that Biden will technically win by the end of the week. But the chances of Trump conceding by the weekend are essentially zero.