JPMorgan explains how to hedge the risks of a new division of the US Congress

The new division of the US Congress will create risks of permanent failure of the stimulus negotiations for the foreseeable future, so investors should consider hedging these risks, warns JPMorgan Chase

The above graph reflects the probability of winning the Senate elections: Republicans (blue) and Democrats (white). Bloomberg data, PredictIt

Negotiating a new stimulus package could prove intractable if, after the election, the House and Senate of the US Congress are controlled by different parties, as they are now, JPMorgan Chase strategist John Normand said in his podcast yesterday. In his opinion, such a scenario of the development of events can greatly harm both the economy and the markets.

Traditionally, investors hedge such risks by buying US Treasury bonds, but today Treasuries offer very limited protection from market volatility, since their yields are already low, the expert notes. Therefore, the “second best option” is buying the dollar against emerging market currencies or the Japanese yen against a basket of currencies.

“Besides, I would also add here the purchase of highly reliable bonds,” the strategist said. “If by the end of the year the US economy finds itself in a difficult situation due to the failure of the stimulus negotiations, then the Fed may increase the volume of purchases of assets in the debt market.”

Yesterday, polling data aggregator FiveThirtyEight reported that the probability of Joe Biden winning the electoral college, which determines the winner of the US presidential election, is 89%. However, many experts recall the 2016 elections and believe that it is too early to draw far-reaching conclusions.

John Normand’s colleague Joyce Chang, who serves as the bank’s global research chief, said in the same podcast that the gap between Biden and Trump is likely to narrow as election day approaches. In addition, she noted that the markets are in vain hoping for the normalization of relations between the United States and China in the event of Biden’s victory. In particular, she is not at all sure that the new administration of the White House will reduce import duties on Chinese goods.

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