Staff at a foreign exchange trading company in Tokyo watch a TV screen showing Donald Trump speaking on US election night
US president Donald Trump injected another source of nervousness into markets early on Wednesday, after he vowed to go to the Supreme Court to halt the counting of votes © Philip Fong/AFP

The absence of a decisive US presidential election win for Joe Biden boosted government bonds and the shares of big US tech stocks on Wednesday, as investors cut back trades that had assumed a “blue wave” Democratic sweep of the White House and Congress.

The S&P 500 advanced 2.2 per cent, led by technology stocks rather than the economy-sensitive shares that had been favoured to climb in a “blue wave” scenario. It was the best day for the benchmark index since June. The tech-heavy Nasdaq Composite, which has far outpaced the wider S&P 500 this year, snapped nearly 4 per cent higher.

Facebook and Alphabet were among the biggest gainers, up 8 per cent and 6 per cent, respectively. Apple climbed 4 per cent.

Investors also rushed into US government bonds as expectations for a big infrastructure spending splurge dimmed. The yield on the benchmark 10-year US Treasury slid 0.13 percentage points to 0.77 per cent, its biggest decline since April. Yields fall as a bond’s price rises.

Opinion polls had led investors to bet that decisive Democratic victories would spark another round of stimulus for the pandemic-stricken US economy. Those hopes are now fading.

Mr Biden may still clinch the presidency in an unexpectedly tight race, but the Republicans’ strong showing in several battleground states, and seemingly tight grip on the Senate, have prompted money managers to prepare for the prospect that the US could be left with a divided government, complicating the investment outlook.

Line chart of 10-year Treasury yield (%) showing Investors rush into US government bonds with election in balance

“The ‘blue wave’ trade has been going on since the summer and has built up more recently, and I would expect it to unravel now,” said Fabiana Fedeli, global head of fundamental equities at Robeco. Economic stimulus and the path of the pandemic were much more significant drivers for markets than the outcome of the election alone, she said.

The yield on the 10-year Treasury had briefly eclipsed 0.9 per cent on Tuesday evening — hitting the highest level since June — in anticipation that a big Democratic win could fire up government spending, and potentially inflation. In turn, that was expected to place more downward pressure on longer-term bond prices, and send yields rising.

But yields dropped as results poured in, reflecting how some fund managers had been caught out. “Markets need to have a serious look at their systems,” said Didier Saint-Georges, member of the strategic investment committee at French investment house Carmignac. “Now we are back to where we were before the ‘blue wave’ trade. We are back to fundamentals.”

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Jim Leaviss, chief investment officer of public fixed income at M&G, said that the slim chance of the Democrats taking the Senate meant that additional heavy-hitting fiscal stimulus was less likely to emerge. “[That] means that in the event that the US economy slows again — and a winter Covid wave is likely — then it will be down to monetary policy to provide support once more.”

The unravelling of that blue wave trade, which had been spurred in part by $2tn of infrastructure and green energy spending promised by Mr Biden, sent shares of would-be beneficiaries in the construction and industrials goods sector like Caterpillar lower on Wednesday. The potential for a divided government also propelled healthcare stocks, with insurers Cigna and Anthem rising more than 10 per cent as investors wagered industry-wide reform was ultimately unlikely.

US president Donald Trump injected another source of nervousness early on Wednesday, after he vowed to go to the Supreme Court to halt the counting of votes as he prematurely claimed victory in the White House race.

“In the next few days, there is going to be very messy news flow,” said Mr Saint-Georges at Carmignac.

That kind of rhetoric may also be helping to boost government bonds. “Some people are using bonds as a safe haven, reflecting the risk of a contested election with bad outcomes,” said Toby Nangle, global head of asset allocation at Columbia Threadneedle. “But right now, I see it as a reduction in the likelihood of very substantial stimulus.”

European markets closed higher on Wednesday, with the Stoxx 600 index up 2.1 per cent.

Additional reporting by Laurence Fletcher in London and Leo Lewis in Tokyo

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