Undecided: How will markets fare in face of more election uncertainty?

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- The US election day has come and gone, but our next guest says the waiting game continues. I'm joined by Priya Misra, she is Global Head of Rates Strategy at TD Securities. Priya, thanks for joining us. I'm sure that you slept, maybe what, 1-2 hours last night. To start things off, what do you see, what is the market pricing in right now in terms of what we're expecting?

- So, the market is pricing in very different from what the market is pricing in just 24 hours ago. I think we were pricing in a day ago, so during election day, we were pricing in a quick outcome. So, I think people expected to know the outcome by today or another day. And we were pricing in a blue wave. And as the results came in, and that's why the market reacted as much, because we came in with a lot of expectations and they were changed.

So now, I think we're looking at, as the recount's happening and we're actually seeing, do we get automatic recounts, do we get a contested election? President Trump did seem to suggest that he would bring the Supreme Court into this. So, it's not just a delay on mail-in ballots, it's also potentially a contested election going all the way to the Supreme Court. So, the uncertainty could be with us for quite sometime, so the market's pricing that in, plus we're pricing in divided government.

I think some assets are not pricing in enough of that divided government because there's still a lot of uncertainty, but I would argue that that's negative for growth. It should be negative for risk assets because I think we need fiscal stimulus and it's looking a lot more difficult when you've got divided government and dysfunction in Washington.

- It's interesting that you put in your note, that I saw that came out this morning, that President Trump said that the plans to challenge on vote counts was a trigger for a risk sell-off. Maybe just delve into that a little bit because I think that's something we're going to be living with, to your point, for quite a little while.

- Right. And we don't have too many episodes in history. I mean there have been really two episodes since the 1800s when they've been contested in this format. In both times-- I guess the most recent one was in 2000-- and we did see risk assets sell off in that entire period when we didn't know in 2000. So, till December, mid-December, when the Supreme Court had not called the election, you sort of don't know who the president is, does anything get done in Congress?

Now one of the things I've been hearing from clients is if Congress doesn't meddle and nothing gets done, isn't that good news. Well, in a normal economy, I would say sure, let the markets function. Except we're not in a normal economy at all.

COVID cases are rising, they're rising-- a lot has been made about the rise in Europe and the UK, the US cases are also rising. We haven't had fiscal support really since the end of July, both sides couldn't come up to a deal into the election. So, the hope was that we would get a deal very soon thereafter, well, if the two sides are fighting over the election outcome, the likelihood of getting a stimulus deal done by mid-December I think is very low.

So, that's why I would say the market is going to react negatively if really the uncertainty persists all the way into December because, number one, you don't know which policy, but number two, the likelihood of getting a COVID stimulus deal I think declines dramatically. So, it is negative for risk assets and negative for growth.

- What are you seeing when you take specifically, if you look at the US dollar, if you're looking at rates, what kind of movement are you seeing right now?

- The dollar actually has been relatively well-behaved over the night. I know it tried to rally a little bit when it looked like maybe Trump could win, but I think having divided government realizing that this is weak for growth, I think the dollar in our view should continue its weaker trend.

The Treasury market is the one that's moved a lot because it was really pricing in a lot of supply and pricing in the only marginal demand was going to be the Fed and so higher rates. And that's why you're seeing a good 15 basis point decline in the long end.

I think given risk assets have actually held in there. The Treasury response is pretty dramatic. If risk assets begin to struggle as people I think go beyond just the election outcome to say, does this mean nothing gets done for the next four years in Congress?

I think then actually rates can decline some more because the Fed is then in a tough position. They're not going to hike for an even longer period of time. So, I think that reach through the action can actually extend even though we've had a pretty big reaction.

- Well, speaking of the Fed, we're going to be hearing from them shortly. So, I don't think anyone's expecting anything dramatic, but maybe I'm wrong. What are you expecting to hear?

- I think people were expecting them to do more because fiscal policy is going to be less impactful, then the hope is will maybe monetary policy can step in. What we've heard consistently from the Fed is they've done their bit. And they don't have, as Chair Powell often says, we don't have spending powers, we have lending powers.

So expect the Fed to reiterate, we keep rates low, but is low rates ultimately what's going to push us out of the COVID weakness? No, I think you actually need fiscal spending. I don't think they'll disappoint us. They'll say we do what it takes, but I think the efficacy of monetary policy in the current environment is just much lower. Lowering rates by 25 basis points actually won't do anything. Which is why I think if risk assets are waiting for that, yes they'll get lower rates, but we do need that growth stimulus, which can only really come from that fiscal side.

- OK, so what are you watching? I mean there's so much you've just unpacked there and it's not feeling terribly optimistic, but if I was to ask you the top three things over the next, I don't know, six months that are going to be key for you, what are you watching?

- I have to say the number one thing has to be the COVID cases. You know we've seen the rise in cases, is there anything done, does that slow down. The vaccine comes into that as well. If we get a quick vaccine, everyone takes it, it's a big question if people will take it. I think ultimately, we're still in the middle of a pandemic. So I think that's going to be the number one thing, do we start seeing a slowing in case count.

Then I think we have to see is there structural damage that has been done in the economy already. Have businesses shut down, which means that, even if all the cases come down, do you actually start seeing the economy able to recover or does more work have to be done.

So, I think we'll be watching for these longer term impacts given that we'll be now living with the pandemic, almost for a year. And then we'll be watching for fiscal measures. Even though I'm skeptical that they can get a lot done, can we get a trillion $2 trillion package. I don't think we're looking at the blue sweep, $4 trillion package. But can we get a $2 trillion type package and can that help until we get the pandemic under control.

These are some of the things we'll be watching. And of course in the very near term, you asked about six months-- I think those are long term issues, but in the next few weeks, we'll be watching the case count-- the ballot count I guess. And even today, Georgia just started counting and the market moved. So, I think that it's the counting. It's put on your lawyer hat. We'll be watching how the Supreme Court handles it, so that's still going to be in focus-- is the election result, I guess.

- It will be an incredibly busy time. Priya, we appreciate your insight as always. Thanks so much

- Thank you.

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