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46th President of the United States: How will A Biden presidency potentially affect the markets?

Market Analysis / 5 Min Read
29 Jan 2021

Highlights 

  • Stocks are likely to extend gains in the short-term with further stimulus measures just around the corner and the Fed reiterating its dovish stance
  • However, tech stocks could come under pressure amid increased scrutiny from regulators and a rotation into small-caps and value stocks, depressing overall market returns
  • The US Dollar might see a small bounce back, but will remain under pressure amid massive government spending and rock-bottom rates
  • Commodities are set to extend gains in 2021 as the global economy recovery is set to gain momentum

Biden sworn into office

On Wednesday, 20 Jan 2021, Joe Biden has been inaugurated as the 46th President of the United States. Markets hate uncertainty, and many investors are looking forward for a period of greater stability. Biden is planning an immediate flurry of executive orders and promised quick action on getting another massive stimulus package through a closely divided Congress.

Nevertheless, the first few weeks of his term are likely to be overshadowed by the impeachment process against Donald Trump. The key questions investors are asking themselves now is, how will a Biden presidency affect markets?

Equities

In the earlier weeks of January, Biden presented his $1.9 trillion aid package for the ailing US economy. It will include bigger stimulus checks, more aid for the unemployed and additional support for small businesses and states. The market reaction was muted, as this was largely priced in and there were no major surprises. Market participants are now keen to see how quick the Biden administration will be able to realise its plan, and are awaiting more details on his broader economic recovery plan.

Prospects of further stimulus measures and with the Federal Reserve set to keep rates low for several more years, the outlook for US equities remains positive in the near-term. However, the Biden presidency will not benefit all sectors. Many investors also fear a reversal of the tax cut that the Trump administration implemented, and greater regulation.

Technology is one sector that could potentially have a rough time over the next few years. Silicon Valley has come under scrutiny by regulators, and the pressure will only be increasing.

The tech companies´ dominance of the U.S. stock market proved beneficial in 2020 and drove massive gains, catapulting it from one record high to another. However, its significant influence could soon become a problem. Lofty valuations, crowded positioning and the threat of greater regulation are all factors that could drive a rotation away from tech into small-caps and unloved “value” stocks.

The S&P 500 has been consolidating in recent days, as traders have been standing on the sidelines ahead of the inauguration and upcoming earnings season. The 21 EMA is one indicator to watch in the short-term, as well as the rising trendline support from the November low. A break below those two major support lines could signal that a deeper correction could be ahead.

Another U.S. index to watch is the Russell 2000 (US2000 in MT4). The index consists of the smallest 2000 stocks in the Russell 3000 index, and has gained significant momentum in recent days. Small-caps have enjoyed an impressive rebound, as investors are betting that they will benefit from Biden´s stimulus plan and a return to some type of normality thanks to a mass vaccination campaign.

While the US2000 does look slightly overbought in the short-term, the key support area to watch lies between 1880 and 1920 points.

Currencies 

The US Dollar could benefit slightly from greater political stability in Washington D.C. and Biden trying to improve relations with key U.S. trade partners. The trans-Atlantic relationship is likely to benefit the most, but his administration will also be looking to enhance relations with Mexico and Canada.

Meanwhile, US-China relations are at their lowest points in decades. It is unlikely that there will be major improvements in the foreseeable future, but Biden could take a more diplomatic approach than Trump. Fears about a full-blown trade war have weighed on markets for a long time, and that risk has now decreased, which will boost the risk appetite of investors.

However, with increased government spending & a bigger deficit and US interest rates set to stay at rock bottom until 2023, the Greenback is likely to remain under pressure.

Which currencies are most likely to rise against the US Dollar in the near-term? Emerging market currencies are likely to benefit the most as traders are betting on improved trade relations and COVID-19 vaccines paving the way to a faster economic recovery. The Chinese Yuan has benefited from China´s solid economic recovery, rising to an 18-month high against the US Dollar. Currencies such as the Mexican Peso and Thai Baht should also be on traders´ radar.

Looking at the major currencies, the Australian Dollar could be a winner in 2021. Australia managed to keep the coronavirus at bay, and its economy is set to benefit from rising commodity prices as well as the economic recovery of its top trading partner - China.

The charts are suggesting that AUD/USD is in overbought territory and that we might see a pullback before the rally continues. The key levels to watch are 0.7460, followed by 0.7340. Should the global economic recovery remain on track, a rally towards the 0.80 level appears likely in the medium-term.

Commodities

Commodities had a tough year, but 2021 could bring a broad recovery. Strong demand from China, a further recovery of the global economy, a weakening Dollar and higher inflation expectations are all hinting at further gains.

Copper had an impressive recovery in 2020. However, the commodity looks dangerously overbought in the short-term, and traders looking to jump on the train might prefer to wait for a pullback towards $3.12-$3.20, where it is likely to bounce.

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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