(Bloomberg) -- Investors should focus on the Senate race in the U.S. election since that contest is likely key for the fiscal policy outlook, Morgan Stanley said, adding that a Democratic sweep may create a buying opportunity by sparking a temporary drop in stocks.
If Joe Biden wins the presidency, “control of the Senate will mean the difference between substantial fiscal expansion and fiscal gridlock, which would challenge some of our colleagues' more bullish views on risk assets,” strategists including Michael Zezas and Ariana Salvatore wrote in a note.
Polls and betting markets suggest a “sizeable” advantage for Biden over Donald Trump in the presidential race, according to the strategists, who said “it would likely require a game-changing event, a polling error of unprecedented proportion, or possibly both” for Trump to win re-election.
The odds of having to wait more than a week for a reliable result after the Nov. 3 vote have come down, they added.
The contest for the Senate, which is currently in Republican hands, appears tighter and is potentially crucial for breaking an impasse over fiscal stimulus.
Treasuries and West Texas Intermediate crude oil appear “least priced” for a so-called Blue Wave outcome where the Democratic Party emerges with control of the White House, Senate and House of Representatives, the report said.
“Equities also appear poised for downward pressure in a Blue Wave, though we argue that would be temporary and a potential dip-buying opportunity,” the strategists wrote.
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