As U.S. election odds narrow, market analysts factor in higher risks

FILE PHOTO: A sign encouraging voter turnout is seen at a campaign yard sign distribution site in Madison, Wisconsin, U.S., October 17, 2020. REUTERS/Bing Guan/File Photo

LONDON/NEW YORK (Reuters) – A higher risk of a split U.S. Congress and a contested election is being factored into some market analysts’ models after some odds on the Presidential election have shown a narrowing.

European betting exchange Paddypower said on Wednesday that while Biden was clearly “odds-on” to win, over the last few days “punters have started backing Trump again.”

According to Real Clear Politics’ presidential election results betting odds from Sept. 30 through Oct. 12, the probability of a Biden win increased, but have more recently slipped.

Paddypower gives Biden a more than 60% chance of winning, versus Trump at around 40%, and says that the odds have narrowed.

Analysts at JPM said in a note on Tuesday that risk markets in the first two weeks of October were supported by a widening of U.S. presidential odds, implying a lower probability of a close or contested election, but over the past week, those odds started narrowing again.

That could pressure risk markets with negative implications for the so-called “value trade,” which is seeing a steepening yield curve and prospective shift towards traditional cyclical stocks like banks, said the JPM analysts.

Brown Brothers Harriman said in a note on Wednesday that with control of the Senate “very much at stake, there is still a large chance we get the most fiscally conservative outcome for this election,” with the chance of a Biden victory with a Republican Senate, and no large stimulus package coming after the election.

RBC equity derivatives strategist Amy Wu Silverman wrote last week that the options market may have “come too far in the other direction” in pricing in a Blue Wave and was underpricing the possibility of a Trump victory.

Predictit odds here on U.S. Senate control show that while the chances of a Democratic Senate exceed that for Republicans, the odds of GOP control have ticked up slightly recently.

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