• The ASX200 fell more than 2% at the conclusion of the US presidential debate.
  • Investor Heath Moss said it reflects the fact markets are concerned about political gridlock.
  • Donald Trump and Joe Biden argued back and forth, with neither party emerging as a decisive winner.

The first US presidential debate was a feisty affair, and both the ASX200 and S&P500 futures fell sharply at its conclusion.

Incumbent Donald Trump and challenger Joe Biden spent 90 minutes debating the key election issues, with plenty of interrupting (and a few insults) thrown in for good measure.

And with about 30 minutes to go, the ASX rebounded from a slow start while S&P500 futures climbed by around 0.6 per cent.

But that was followed by a sharp reversal, as US stock futures fell back into the red.

A short time ago S&P500 futures were down more than 1 per cent, while the ASX200 drifted lower throughout the day — on track for its worst session since September 9.

So what happened? For one thing, while the presidential debate was back-and-forth in nature, it was also close.

A CNN poll conducted after the debate gave a slight edge to Biden, with six in 10 respondents giving him the nod.

And speaking with Stockhead, equities advisor Heath Moss from HLM Investments said markets don’t like ‘close’ — they prefer clarity.

“In a nutshell, I think markets want to avoid a contested election,” Moss said.

“We’ve seen it before in politics where if elections are close, it’s hard to push any policy through.”

In particular, Moss cited the package of the next US federal stimulus bill to combat the COVID-19 pandemic — which lawmakers still haven’t agreed to.

“That doesn’t look like it’s going to happen before the election now. So I think the market wants assurance moving forward it will get that stimulus,” he said.

“If it’s contested and it’s close, I still think additional stimulus will get through but it will just take longer.”


Recent history

For an Australian comparative, Moss recalled the 2016 federal election, where the Turnbull-led coalition government was returned to office with the slimmest of majorities.

“If you look back to 2016, that election was extremely close and the end result took about a month to be resolved,” Moss said.

“During that time business was hamstrung and spending was down, and we even had a negative quarter growth because of it.

“Then for the next three years, it was very difficult to get any meaningful legislation or polices through, because the parties couldn’t come to an agreement.”


Hedging bets

Looking ahead, Moss also noted that traders in the huge US options market were bracing for some political volatility if the result was close or contested.

“We’ve seen some evidence in terms of the put options market for volatility on the S&P500,” Moss said.

“The premiums for that are quite high, which suggests quite a bit of hedging has already been done for the market on the downside.”

In the event of a decisive victory either way, then those options “would likely unwind which would also be better for the market”, Moss said.

So a decisive victory either way is likely to buoy the market, and in that context it doesn’t matter as much if the victor is Biden or Trump.

“I think on one hand if the Democrats win in a big way, it may be even more bullish simply because they already have numbers in the (lower) House,” Moss said.

“If they get the numbers in the Senate it will help them push through policy. If Trump wins decisively, I still think it will be good for markets, but because of how many seats they need in the House it’s unlikely they’d be able to turn it around.”

“So I think the market is more focused on a decisive outcome either way, and avoiding a contested election outright.”