Initial U.S. Elections Impact on Commodities

on Nov 5, 2020
Updated: Dec 19, 2022

The day following the U.S. elections vote did not generate wild market moves. Unlike in 2016, when Trump’s surprising win over Hillary Clinton created much volatility, the commodities and stock market reacted in normal parameters.

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It is worth mentioning that the image below shows the main financial assets change ahead of the U.S. market opening one day after Election Day. Basically, it comprises the price action after the cash market closed on Election Day and the opening the next day.

The U.S. elections remain undecided so far, with perspectives that the ballot counting process is likely to continue. For example, Pennsylvania announced yesterday that all the ballots would be counted only past Friday. With such a tight race, much tighter than many have anticipated,  many traders wondered what the initial markets’ reaction will be?

Financial Assets Performance In Election Day’s Aftermath

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Commodities reacted differently depending on the sub-class they are part of. For example, precious metals act as a hedge in a portfolio. As such, silver, gold, and platinum experienced some of the biggest declines, falling 2.5%, 1.8%, and 1.1%, respectively. The idea behind the decline in precious metals is that in a risk-on environment led by higher stock prices, investors will dump safe-haven assets and stand ready to assume more risk.

Oil was the returns’ champion over the period monitored, with WTI and Brent crude oil gaining more than 2%. Investors were encouraged by the perspective of more OPEC+ cuts, and oil simply added to the rally that started a few days ago as it bounced more than 15% from the lows. As such, one can safely assume that the rally in oil had nothing to do with the U.S. elections but more with the developments in the oil market led by changes in the supply and demand balance.

From a sector point of view, the energy sector outperformed by a mile, and the rest of the commodity sectors underperformed. At the same time, the stock market, as measured by the S&P 500, was up, and so was the dollar index.

The three asset classes – commodities, stocks, dollar index – mixed performance fully reflect the uncertainty surrounding the elections. Higher stocks and higher dollars are not a relationship to see any day, for instance.

Once again, this proves that during uncertain times with many unknowns on the table, the best thing to do is to wait for the dust to settle before taking a trade. This way, unusual market reactions are avoided, and the portfolio does not suffer unnecessary drawdowns.

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