European Stocks Rally as Investors Await U.S. Election Results

European equities climbed as the U.S. presidential battlefield narrowed to a smaller number of states, with both incumbent Donald Trump and Democrat Joe Biden still locked in a race that remains too close to call.

The Stoxx Europe 600 Index advanced 2.1% by the close in London, having erased a decline of as much as 1.3%. Stocks extended gains after the betting odds indicated an increasing chance of a Biden presidency, and his path to an Electoral College win widened. More defensive sectors such as health care and technology rose the most, while cyclical stocks including banks retreated.

The U.S. election remains up in the air with results from some key states possibly taking until at least midday Wednesday to resolve. Stocks had declined earlier after Trump falsely declared he had won re-election and said he would ask the Supreme Court to intervene, even as several states continued to count votes. Investors also adjusted their portfolios for a future without massive debt-fueled spending and a rollback of Trump’s signature tax cuts as the prospect of a Democratic sweep of Congress faded.

European Stocks Rally as Investors Await U.S. Election Results

“The question now is whether an election is close enough to contest, or whether the voting can somehow be disrupted,” said John Roe, head of multi-asset funds at Legal & General Investment Management. “We’re focused on the contested election risk. We’re looking for assets that look unfairly hit.”

U.S. election woes add to concerns over fresh lockdowns across Europe, which last week sparked a selloff that dragged the Stoxx 600 to a five-month low. However, the market rallied for four consecutive sessions through Wednesday, posting the biggest advance since April.

While it may take a while to untangle the results of the U.S. election, volatility and the put-call ratio on the Euro Stoxx 50 Index show that investors aren’t particularly spooked by the outcome so far.

European Stocks Rally as Investors Await U.S. Election Results

As it stands, the results suggest Congress is likely to stay divided, and for investors that means that it’ll likely be harder for lawmakers to approve a big new stimulus deal.

“Looking beyond the short term, the lack of significant fiscal stimulus could prove to be a major drag on the U.S. economy and markets,” Unigestion’s cross-asset solutions team said in emailed comments. “The rotation and/or reflation trades that a Blue Wave would have augured are also off the table.”

Reduced concern over a “Blue Sweep” of Democratic wins gave a boost to European drug stocks, said Ketan Patel, a fund manager at EdenTree Investment Management. The Stoxx 600 Healthcare Index gained 4.9%, making it the top-performing sector in Europe on Wednesday.

©2020 Bloomberg L.P.

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