What next for US economic stimulus?

It is less than a week since one of the most divisive election nights in modern US history and Wall Street has already made up its mind on how the outcome will reshape the investment landscape. 

A “powerful rotation” swept the US stock market last week as investors repositioned their portfolios to reflect a Biden administration restrained by a Republican-controlled Senate led by Mitch McConnell, according to David Kostin, Goldman Sachs chief US equity strategist.

Perceived beneficiaries of government gridlock such as Big Tech rallied, while those that would have benefited from an unconstrained spending splurge, such as infrastructure, banks and renewables companies, fell. 

But what if investors have got it wrong again? 

The composition of the Senate will probably be determined by a duo of run-off races in Georgia on January 5. Investors and political analysts reckon Democrats’ chances of winning both are slim, but not zero. Based on current calculations, if Democrats flip both Senate seats, there would be a 50-50 split that gives vice president-elect Kamala Harris the deciding vote. 

The races are expected to be among the most expensive ever for both sides. It could also be expensive for investors if it causes another strong reversal that catches them off guard.

“Policies that just a few days ago were the base case outlook for many investors, including over $2tn in virus related fiscal spending, a potential infrastructure package, and the prospect of higher corporate tax rates, could suddenly again become possible,” Mr Kostin said. Adam Samson

Can the pound maintain its momentum?

Sterling has climbed by 1.6 per cent against the dollar since the start of the month, but it faces two challenges this week: third-quarter gross domestic product figures and the jobless rate for September.

The UK currency, which has ridden a wave lifting riskier currencies during the US election, has stood in contrast to the domestic economy, which continues to be battered by the coronavirus pandemic.

On Thursday, the Bank of England revealed it would inject an additional £150bn into its bond-buying programme from January in an effort to offset the economic effects of the pandemic, and potentially also to soften the blow of a failure to reach a trade deal with the EU. Talks have reached an impasse on a trade deal, eight weeks before the UK falls out of the bloc’s trade and customs structures.

Preliminary third-quarter GDP figures, out on Thursday, will probably confirm that output has undershot the central bank’s projections from August, according to Sanjay Raja, an economist at Deutsche Bank. He expects the reading to show a 16 per cent uptick compared with the previous quarter, when the economy shrank by a fifth and fell into its deepest recession on record.

“A record rise, following a record quarterly collapse,” he predicted. “But the UK’s rebound will be shortlived.”

Unemployment figures for September from the Office for National Statistics, out on Tuesday, could also weigh on the pound. Regional lockdowns in the UK affected almost 15 per cent of the population in that month. Eva Szalay

Will the rate of inflation in China continue to fall?

On Tuesday, China’s consumer price index, a measure of the cost of household goods and services, is expected to add just 0.8 per cent year on year for October, according to economists polled by Bloomberg. That would mark the slowest rise since February 2017.

The metric narrowly undershot expectations in September, when CPI for the country came in at 1.7 per cent compared with a year earlier. In the same month, core CPI, which excludes food and oil prices, was unchanged at 0.5 per cent.

Consumer activity has been a relatively weak part of China’s rapid recovery from the coronavirus pandemic, which has been driven by the country’s industrial machine. The rate of inflation has also been pushed down in recent months as the effects of floods over the summer, which hit the supply of food, began to wane.

Retail goods sales only returned to growth in September after seven consecutive months of decline. A gradual revival in spending came alongside signs of continued caution from Chinese households.

Erin Xin, an economist for greater China at HSBC, said in response to the September data that softer consumer prices in general gave policymakers room to “stay accommodative”.

“While recent data suggests there is continued momentum in the recovery of both the external and domestic sectors, the global backdrop continues to face uncertainties and the recovery in China’s private sector remains tenuous,” she noted last month. Thomas Hale

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