"Winner Soon Emerges" Market Rally... Fed Maintains Zero Interest Rate, Supporting Economic Stimulus

[Asia Economy Reporter Seulgina Jo] Although uncertainty remains over the refusal to accept the presidential election results, the market continued its relief rally. Democratic presidential candidate Joe Biden is approaching the magic number of 270 electoral votes to win the U.S. presidency, raising expectations that "the winner will soon be confirmed." If the current trend continues, the weekly gain of the New York stock market this week is expected to be the highest since last April. It is also the first time since 1982 that the Dow Jones Industrial Average and the S&P 500 index have risen more than 1% for four consecutive trading days.

On the 5th (local time), the three major indices of the New York stock market rose together. The Dow closed at 28,390.18, up 1.95% from the previous session. The S&P 500 index rose 1.9%, and the tech-heavy Nasdaq index closed up 2.6%. Unlike the previous day's rally led by tech stocks, most industrial stocks including banks showed an upward trend on this day.

This market rally is particularly notable as it continued even on the second day of vote counting without a confirmed winner of the presidential election. The Nasdaq index jumped 8.9% this week alone, powered by IT giants such as Facebook and Amazon. The Dow and S&P 500 indices recorded gains of 7.1% and 7.35% respectively over four days. Economic media CNBC reported, "The best weekly gain since April," adding, "It is the first time since 1982 that the Dow and S&P 500 have risen more than 1% for four consecutive trading days."

In particular, the increased likelihood of Biden's victory on the second day of vote counting was interpreted by the market as a signal of uncertainty removal. The reduced possibility of a Blue Wave, where the Democratic Party would control both Congress and the presidency, also acted as a positive factor. In this case, Democratic pledges such as tax increases and IT company regulations would be difficult to implement. Lindsey Bell, Chief Investment Strategist at Ally Investment, explained, "The division of the House and Senate (between Republicans and Democrats) is expected, and this is what the market prefers." She noted that since 1945, when executive and legislative powers have been divided, the S&P 500's gains have been remarkable.

Amid these positive evaluations of the U.S. presidential election results, the Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as the fear index, also fell to 27.8, the lowest since mid-October. Eric Stein, Chief Investment Officer at Eaton Vance, assessed, "There is a possibility of market turmoil due to the election results, but it is not the level of risk investors worried about before."

Experts unanimously agree that expectations are reflected in the market that the role of the U.S. central bank, the Federal Reserve (Fed), will increase as the scale of government-led economic stimulus shrinks. There is growing speculation that the Fed will take active stimulus measures by extending the low interest rate policy and expanding bond purchases.

On this day, the Fed announced it would keep the benchmark interest rate unchanged at 0.00?0.05%. The statement from this month's Federal Open Market Committee (FOMC) showed almost no change compared to the previous month, but added the phrase "financial conditions remain accommodative."

Fed Chair Jerome Powell, during a virtual press conference, expressed concern over the resurgence of COVID-19, emphasizing that "additional stimulus through monetary and fiscal policy is necessary." When asked whether the Fed's stimulus tools have been exhausted, he replied "No," stressing that "the bullets have not run out." This indicates expectations for the Fed's active response to COVID-19 and economic stimulus.

Following the confirmation of Republican dominance in the Senate, demand for government bonds has also increased. Previously, due to Blue Wave expectations, the yield on the 10-year U.S. Treasury bond surged to 0.9% on election day but remained around 0.77% on this day and the previous day. President Donald Trump's requests for recounts and lawsuits also increased demand for some safe assets including government bonds. Bond yields move inversely to bond prices.

The price of gold, a representative safe asset, rose 2.7% to $1,946.80 per ounce, marking the highest level in seven weeks. Analysts suggest that the weaker dollar led to increased investment in gold as a safe haven. Major foreign media interpreted that "a weaker dollar is expected with the Biden administration's inauguration," and that gold prices rose following the increased likelihood of Biden's victory.

International oil prices turned to a decline after four trading days. On the New York Mercantile Exchange (NYMEX), December delivery West Texas Intermediate (WTI) crude oil fell 0.9% to $38.79 per barrel. This reflects concerns that the resurgence of COVID-19 will slow the economy and reduce energy demand.