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US elections - Analysis of chosen instruments 29/9 – 5/10/2020

We have 4 weeks until the election and volatility remains high in the markets as VIX fear index is above 28 (normal value is around 15). Three events contributed to this volatility last week:
 

  • The first presidential debate
  • President Trump got the coronavirus
  • In the US, negotiations continue for further economic stimulus.
     
Negotiations on the economic stimulus have been going on for several weeks. Last week indicated that hopes for approval of the package are rising and stock indices responded with growth.

The presidential debate

For voters, who already know who they will vote for, this debate brought nothing new. Those, who are still undecided and hoped that this debate will help them decide, will probably have to wait. The debate was accompanied by constant disruption and aggressive attacks, especially by the current President Trump. That is why the American media described this debate as something that has not been here before. Equipped with the knowledge, Joe Biden didn't last Trump's interruption and said, "Will you shut up, man? That's so unpresidential."

Some Republicans have also expressed dissatisfaction with the outcome of the debate, bothered by Trump‘s reluctance to express dissatisfaction with racial extremism. 

When asked whether Trump would accept the result of the election, he did not answer directly but instead spoke about the risk of possible fraud if the election took place by postal voting.
 

Postal voting

Postal voting is nothing new in America, it is standard in some states and it has already started in September. The problem would be if this way of the election was in all countries because they do not have experience with it. 

In this context, an interesting report appeared in the press, namely that if the postal voting took place in all states, then it is possible that it would take some time to count all ballot papers and it cannot be ruled out that it could take weeks or even months to know the winner of the election.

In addition, there is indeed a risk of mistakes in this way of the election if we do not want to use the word fraud. For example, a mistake may occur if the responsible member of the election commission does not recognize the correct signature of the voter.
The problem may also be with a delivery delay, as the US Postal Service has limited capacity, in part because President Trump blocked a proposal to increase its budget. If the voters’ ballot papers are not delivered in time, then, of course, it will be invalid, etc.
 

Trump and the coronavirus

The coronavirus is a crucial issue that can decide the outcome of the US election. The President did not solve this problem well, and it deprived him of the votes of people in crucial states. Eventually, last week, he infected himself with coronavirus. "The diagnosis is a severe blow to the President, who is trying his best to convince the American public that the worst of the pandemic is over," the AP reports.

According to the latest reports, his illness should be mild and he has been released from the hospital. However, he is still contagious and has infected several dozen people before, including members of his election team. Due to illness, he had to cancel the planned pre-election meetings.

So now it is clear that he will have to improvise a lot in this chaos.
Should the situation change so that the disease becomes serious, this would have a negative impact on the stock markets.
 

Election preferences as at October 5, 2020

As for the so-called popularity election, i.e. how many people would vote for their candidate, Trump got a little worse than previous week. Joe Biden continues to lead by a difference of 8% as we can see in Figure 1. 
 
Figure 1: Survey of election preferences, source: https://ig.ft.com/us-election-2020/

We reiterate that what matters for the success in the US election is not the number of votes that a presidential candidate receives, but the countries in which he manages to win. In order for a candidate to become president, he must win the votes of at least 270 electors. If the candidate did not reach the required number of electors, then the President would be decided by Congress according to a special constitutional procedure.

The number of electors varies from state to state and depends on the population of that state. Therefore, it is necessary to recalculate the votes of people according to the state in which they will vote and then assign the candidates the number of electors obtained.

While last week Joe Biden would get exactly 255 electors, the situation has now changed and Joe Biden would currently get 279 electors, see Figure 2:

 

Figure 2: Conversion of peoples' votes according to preferences to electors, source: https://ig.ft.com/us-election-2020/

Toss-up states  are the states in which this year's elections are very likely to be decided. In these states, none of the candidates currently has a certain victory. With a total of 134 electors at stake in these states (there were 158 electors last week), it can be said that even if Trump won in these states, it would not be enough for him to win the election overall, according to this survey.

Because the elections will be affected by the development of the coronavirus pandemic, Figure 3 shows the current development of the coronavirus in the United States.

Figure 3: Development of new cases of COVID-19 in the USA, source: https://www.worldometers.info/coronavirus/country/us/
 

Technical analysis as at October 5, 2020

The moving averages used in the technical analysis are EMA 50 (orange line) and SMA 100 (blue line).
 

The SP 500 Stock Index


The index is moving in a growing trend, as shown in the chart in Figure 4. The correction, which had been taking place since the beginning of September, stopped and the price has broken through the top line of the declining channel, which in this rising trend resembles the price formation of the flag. Support for bull growth was received by Trump's return to office, as well as growing hopes that the economic stimulus package could be approved soon.

But the price has now reached the first level of resistance. If the markets realizes the fact that Biden could win the election, this could be rather negative for the index and the price could turn down. We wrote an explanation of the reasons for this in our e-book on elections. 
 
Figure 4: The SP 500 on a daily chart

The situation on chart H4 then looks like this, see Figure 5. ​
 
Figure 5: The SP 500 on H4 chart

Here, it can be seen that the moving averages reached the bull constellation because EMA 50 (the orange line is below SMA 100 blue line). Points A and B forms double bottom supports, and the level around point C is the peak of the double bottom formation, which is the bullish signal. But the price has now reached the first band of resistance. If there were a breakthrough, then from the point of view of technical analysis there might be free space for further growth.

Resistance 1 is in the zone 3,400 - 3,425.
Support 1 is located in the range 3,305 – 3,315.
Support 2 is then in the range 3,222-3,265.

The significant level is especially 3,234, which was the opening price at the beginning of 2020.
 

The EURUSD


Of course, the election result will also have an impact on the US dollar. That is why we present the current situation on the most popular currency pair the EURUSD. On a daily chart, this pair is in Figure 6:
 
Figure 6: The EURUSD on a daily chart

The EURUSD is in a growing trend, followed by a side movement. The level of support for this move was broken and the pair began to weaken, mainly due to the increase in COVID-19 cases in Europe.

After the first presidential debate, however, the euro strengthens, partly under the influence of current electoral preferences and partly under the influence of the fact that negotiations on the next economic package are still taking place in the USA. And as hopes that this package should finally be approved grow, it brings optimism to the markets, which is reflected in the weakening of the dollar.

In any case, the euro has risen above the first resistance and it seems that growth could continue. The reasons why the euro could strengthen in the event of Joe Biden's victory are given in our e-book on the presidential election. However, further developments will also depend on the course of the coronavirus pandemic in Europe.

 

Key levels:


Resistance 1 is in the range 1.1930 - 1.2000
Support 1 is in the range around 1.1600 - 1 1620 (the last low, from which the price is currently moving upwards).
Support 2 is in the range 1.1450 - 1.1500. Here, there is Fibo 61.8% and at the same time there is a break of previous resistance. 

 

What awaits us this week?


On October 7, 2020, according to US time, there should be a debate of candidates for the office of Vice President. So it will be a duel between Republican Mike Pence and Democratic candidate Kamala Harris. 
 

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