US markets get an election preview from India and Mexico: Morning Brief


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Ahead of the Trump-Biden showdown this November, two surprise election results this week from opposite ends of the world are reminding investors of the uncertainty that uncertainty in political regimes can bring.

Just south of the US border, Claudia Sheinbaum won a landslide election on Monday to become Mexico’s first female president. The presidential win was expected, but the surprise came as her Morena party nearly obtained a supermajority in Congress.

Mexican markets were roiled on concerns the ruling government would be able to push through constitutional amendments. The Mexican stock exchange (^MXX) plummeted nearly 6% Monday, while the peso fell 4% versus the US dollar and a slightly larger amount versus the yen.

Investors searching for yield have been able to borrow at near-zero rates in Japan and buy the peso to earn the 11% short-term interest rates set by their (relatively) hawkish central bank.

Those investors were concerned that a radical government could upset the balance. And in the heavily leveraged world of hedge fund bond trading, volatility itself is often the real enemy — even if investors get the direction “right.”

But Tuesday, as it became clear that the supermajority would be narrowly missed, stocks rallied sharply, with the MexBol (as it’s called) ending the day in the green, up over 2.5%.

Over in India, anticipation around general elections left investors tense as Prime Minister Narendra Modi’s Bharatiya Janata Party faced a heated contest.

Opinion polls over the weekend suggested a landslide win for Modi and his agenda, briefly sending India’s benchmark Sensex index (^BSESN) to a record high.

However, as election results were tallied, the margin of victory narrowed, and Indian stocks plunged 7%, erasing $386 billion in market value. Meanwhile, India’s currency, the rupee, experienced its most volatile session in a year.

All in all, the fallout from uncertainty was better than feared in both countries. Markets didn’t disintegrate.

Investors might be reminded of white-knuckling the 2016 election results in the US as news of Trump’s win was digested.

Stock futures traded their maximum limit down by the morning after the polls closed. But after the open, those losses were quickly pared as US markets rallied and never looked back. A 4.5% loss became a 1% win that day. Stocks would end November 2016 up 3.4%.

Four years later, a soon-to-be President Biden won against Trump in the polls, and stocks surged over 10% that November.

Investors can parse historical tendencies six ways from Sunday, but stocks tend to go up over the long term. Politics can get in the way, but it’s hard to stop a bull market.

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