u.s. election

The U.S. election outcome is clearer, but investors should expect volatility in the coming months as Senate control remains up for grabs, potentially affecting bond yields, fiscal stimulus and other policies.

President-elect Joe Biden won’t take office until Jan. 20, and with a Senate majority at stake in a pair of Georgia runoff elections that month, “market participants should expect considerable volatility,” said a report by Derek Holt, head of Scotiabank Capital Markets Economics.

The Georgia Senate seats will determine whether Biden faces a “blue light” scenario, with a split Congress, or a Democratic “blue wave” in Washington, said the report.

“A blue light scenario would probably be ideal to bonds and equities together because it would reduce trade policy uncertainty at least for a time, while offering modest fiscal stimulus instead of more aggressive action that could put upward pressure on Treasury yields,” the report said.

“It could also check some policies that may adversely impact specific equity sectors.”

A Democratic Congress and White House, on the other hand, could see broader fiscal spending that drives faster growth and steepens the yield curve.

“Clearly there remains much at stake, which merits high caution surrounding forecasts for Treasury yields, stocks and other market variables,” the report said.

Rather than the US$2-trillion stimulus bill House Democrats passed before the election that failed to make it through the Senate, a report from CIBC Economics said a bill worth US$1 trillion to US$1.5 trillion could be approved in December or early in the 2021 congressional session.

Even with a divided government, the U.S. government is likely to run large deficits, the report from economists Avery Shenfeld and Katherine Judge said. That would put “upward pressure on bond yields as an improving economy allows the Fed to ease off on QE buying and, by 2023, begins to raise short rates,” the report said.

The climb will be gradual, with rates remaining historically low and governments borrowing without amassing onerous debt service bills, the report said.

For Canada, the most important election impact could be a more co-ordinated effort to combat the Covid-19 pandemic, which would improve growth prospects for Canada’s largest export market, CIBC stated. Other factors for the Canadian economy are U.S. corporate tax and immigration policies.

Biden pledged to roll back the corporate tax cuts enacted under President Donald Trump, but a Republican Senate could limit tax policy, the CIBC report said. Still, Canadian governments facing growing deficits and debts from pandemic spending could “see room to hike business
tax rates or alter depreciation provisions here should the U.S. move that way.”

U.S. immigration policy under Biden could also present a challenge to Canada’s efforts to attract skilled workers, the report stated, if he lifts Trump’s restrictions on visas.