Patience is a virtue – More waiting ahead on Senate race

At the time of writing, we still do not know who has won the presidential election but the indication is that Biden might be able to pull it off. Perhaps even more interesting, the Senate election remains extremely close and it seems that who is going to win the majority in the Senate will be decided at two special Senate elections for both seats in Georgia in January, as no candidate has been able to get more than 50% in both elections. According to betting markets, the race will be tight, giving a Republican majority a 75% probability. If the Democratic Party wins both seats, it would secure a majority (as the Vice President is decisive if both parties have 50 seats). That would make it is much easier for the party to pass both a short-term relief package and larger changes to economic policy (both in terms of tax changes and increased spending on infrastructure and green energy, among other things). This also means that markets may be in limbo for two months if we do not get other news in the meantime.

Meanwhile the US sets new records for the increase in COVID-19 cases and hospitalisations have topped 50,000 for the first time in three months. A proportion of tests coming back positive of more than 5% is concerning, according to WHO, because it indicates undetected transmission. The rate is above 50% in South Dakota and above 40% in Iowa and Wyoming. 17 states have a positive test rate of over 10%.

In the EU, an agreement was reached on the first rule-of-law mechanism making it possible to suspend budget money to member states that breach fundamental rights. This is an important step before further talks on the recovery package. Next week, we will keep a close eye on the COVID-19 situation; there might be more partial lockdowns and will we start to see some positive impact on the virus numbers in the countries that have already imposed restrictions. Greece was the last country to strike down hard with a nationwide lockdown for three weeks. On the data front, the ZEW figures will give us a first glimpse how the economy is faring in November and how much the partial lockdowns have dented economic expectations.

We also had a series of central bank meetings this week. The Bank of England (BoE) increased its QE programme by GBP150bn, a little more than expected and extended it to run to the end of 2021. The British economy is currently faced with partial lockdowns and BoE expects a further GDP contraction of 2% in Q4. The Fed kept its policies unchanged and Fed chair Powell repeated that the Fed will welcome more expansionary fiscal policy without tightening monetary policy but otherwise the Fed meeting did not deliver any news of significance. Norges Bank left rates unchanged as widely expected. It currently faces a domestic economy developing as expected while both downside risks (COVID-19) and topside risks (domestic housing market, debt growth) have risen.

Wall Street rallied this week as the prospect of a Republican-controlled Senate eased tax worries for corporates. European equities had a good week too. They would probably benefit more from a clean sweep and a resulting large US fiscal package, but they did benefit from the breakthrough on the EU recovery package. In China the solid economic rebound gained further strength with Caixin PMI manufacturing at the highest level in nine years, highlighting the rebound of the Chinese economy.

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