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US shares construct on rally as elections disrupt market outcomes

Wall Street stocks rebounded on day two and the dollar weakened as the election results released so far changed predictions about the US economy, regulation and interest rates.

The Nasdaq Composite gained 2.7 percent in early trading after the tech-heavy index rose 3.9 percent on Wednesday. The blue-chip S&P 500 rose 2.4 percent.

Thursday's rally was broad, with all sectors of the S&P 500 up, in contrast to Wednesday's advance led by tech groups. The S&P 500 banking sector, which had fallen 4 percent in the previous session, made up almost all of those losses on Thursday. The industry rose 2.7 percent.

The dollar index, which measures the dollar's performance against the currencies of six trading partners, fell 0.8 percent.

This was an extension of a trend that began with the election results coming in on Tuesday evening. A stronger-than-expected performance by Donald Trump in the presidential race and fading expectations of Joe Biden's Democrats will turn Wall Street's expectations of a "blue wave" that could have sparked $ 2 billion in economic stimulus on its head.

Investors viewed this forecasted spending spree as a long-awaited catalyst for global asset revaluation, with a recovery in US growth supporting higher inflation and bond yields, as well as a stronger dollar.

"When you came to this election, you had a market that was longing for technical and low-yield government bonds," said Johanna Kyrklund, Schroders' chief investment officer. "But now it looks more like that."

The Nasdaq is up nearly a third in 2020, while government bond yields have largely returned to pre-election levels.

With the president's race too close to call it off and with expectations rising for a divided Congress, investors on Thursday repositioned their portfolios to accommodate expectations of slower growth, more Federal Reserve stimulus and less chance of bigger changes corporate regulation and taxation.

Video: US Elections: How Markets Respond to Early Results Charts That Count

It is "pretty clear" that if Mr Biden wins, "he will face resistance in Congress when it comes to change, be it budgetary or regulatory," said JPMorgan strategist John Normand.

"This is great news for those who believe government inaction in the medium term is generally good for asset prices in the medium term."

The Vix, an index of expected volatility for the S&P 500 known as Wall Street's “fear measure”, fell 2.6 points to 26.9, its lowest level since October 22, despite being above its long-term Average of 20 lay.

Eric Stein, Eaton Vance's chief investment officer, fixed income, said investors “saw through” the period of uncertainty.

"The market seems to be saying it could get messy, but it's not as much of a risk as people feared before."

Meanwhile, investors continued to buy longer-dated US Treasuries, pushing yields down. The 10-year rate of return recently fell 0.02 percentage points to 0.75 percent, after rising above 0.9 percent on Tuesday before polls closed in some key states. Some eurozone bonds also rallied and the yield on the five-year Italian bond turned negative for the first time.

Fixed income investors were also expected to pay close attention to a Federal Reserve monetary policy statement due to be released Thursday afternoon in Washington.

Additional coverage from Hudson Lockett and Thomas Hale

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