Buy the rumour…

Profit taking is kicking in after a remarkable run in financial markets, with stocks adding more than 7% in the midst of the most controversial US election in decades.

Buy the rumour, sell the fact is an age-old adage in the markets and this week is shaping up to be a perfect example of that. Undeterred by the prospect of long drawn out legal challenges and recounts, stock markets rallied strongly from the word go this week, ignoring the noise and instead rejoicing in an election result that delivers stability and no major overhauls as far as policy is concerned.

A split Congress is going to make it very difficult for Biden – who appears to be closing in on victory as the final votes are counted – to deliver on some of his more ambitious policies, many of which were widely viewed as market negative. The failure to secure the blue wave also means any stimulus will be smaller than it would have otherwise been but the way markets have responded, they’re viewing it as a small price to pay for stability.

It has been astonishing at times how relaxed investors have been as events have unfolded – Trump declaring victory, threatening to go to the Supreme Court, making legal challenges etc – any of which may have undermined the vote and risked long delays. Investors have retained the faith in the process and are being rewarded but it seems the initial rally has run its course and cash is being taken off the table. Biden is likely to be declared the winner very soon and that fact is being sold.

The Fed unsurprisingly opted to keep its powder dry on Thursday, with the central bank being in no rush to ease and, I’m sure, having little interest in making a major policy announcement during election week. There would have been no sense in doing so and, should they choose to ease further, December isn’t too long away and by then they’ll be equipped with new economic projections and election week drama will have passed.

The RBA and BoE this week eased further as their economies suffer as a result of Covid, with the latter starting a national lockdown on Thursday. The ECB will join them in December when it will also have new economic projections and a better grasp of how bad the situation has become. It would be no surprise if the Fed eases too, especially given the failure on Capitol Hill to deliver much-needed stimulus prior to the election.

It’s easy to forget that we’ll get jobs numbers from the US today. Usually the highlight of the first week of the month, this time around it’s barely been on the radar. The economy is expected to continue making progress, with employment expected to have risen by almost 600,000, taking the unemployment rate down to 7.7%.

While this is encouraging, the dreaded second wave is upon us and there’s still no stimulus to shield the economy from the damage it cause. Who knows how long it will be before that arrives but the longer it takes, the heavier a toll it will take. And what impact will the election have? It doesn’t look good.

For a look at all of today’s economic events, check out our economic calendar. www.marketpulse.com/economic-events/

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