Dollar drops, stocks and bonds gain after US midterms: Markets wrap

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Published: November 7, 2018 3:49:16 PM

The dollar retreated, U.S. equity futures jumped and Treasuries climbed as investors mulled the fallout from American midterm elections.

Dollar, US equity futures, Asian shares, Donald Trump,  IMF, Christine Lagarde, Federal Reserve, brexit dealThe outcome largely matched polling going into the vote, and it’s likely investors will now refocus their attention. (Reuters)

The dollar retreated, U.S. equity futures jumped and Treasuries climbed as investors mulled the fallout from American midterm elections. European stocks rallied and Asian shares were mixed. With Democrats winning the House of Representatives majority and Republicans clinching control of the Senate, President Donald Trump’s party loses full control of Congress. The results dim chances for any major fiscal initiative from the administration that might have triggered yield gains and hence a stronger greenback.

The outcome largely matched polling going into the vote, and it’s likely investors will now refocus their attention. The biggest macro theme remains the trade war after recent warnings from major names including the IMF’s Christine Lagarde and Former U.S. Treasury Secretary Hank Paulson. Elsewhere the Italian government is holding a confidence vote on Wednesday, the Federal Reserve is set to decide interest rates on Thursday, and Theresa May is pushing on with efforts to agree a Brexit deal.

Key News

President Donald Trump called Nancy Pelosi, the leader of the Democrats in the House of Representatives, to congratulate her party for winning a majority in that chamber. Spain’s largest banks escaped paying billions of euros in back taxes after the Supreme Court said they aren’t liable for mortgage stamp duty payments. Shares surged. German industrial output picked up steam in September, signaling that the euro area’s biggest economy may be starting to overcome its third-quarter loss of momentum. The euro strengthened.

Comments

The election result is “not too unexpected,” said David Solomon, Goldman Sachs’s CEO, in an interview with Bloomberg Television. “I’m not a big believer this is going to have a big impact on policy or action or Washington or where we are for the next two years.” “The chance of major policy initiatives is low, as more time will be spent on scoring political points,” said Steve Englander, global head of G10 currency research at Standard Chartered Plc. “But the risk that the 2020 election could produce a sea change in policy is also reduced.” “For global markets and the global economy as a whole, I think this was the best outcome,” said Nader Naeimi, head of dynamic markets at AMP Capital Investors in Sydney. “When you look at the pressure on the U.S. dollar, the expectations of more fiscal spending in the U.S. adding to more pressure on debt and debt issuance, having a split government now with more checks and balances is actually a positive set-up for markets.”

Moves

Futures on the S&P 500 Index increased 0.8 percent as of 9:29 a.m. London time, the highest in three weeks. The Stoxx Europe 600 Index jumped 1.1 percent to the highest in four weeks. The U.K.’s FTSE 100 Index rose 1.1 percent. Germany’s DAX Index rose 1.2 percent. The MSCI Asia Pacific Index rose 0.2 percent. The MSCI Emerging Market Index climbed 0.5 percent to the highest in more than a month. The Bloomberg Dollar Spot Index dipped 0.5 percent to the lowest in almost three weeks. The euro gained 0.5 percent to $1.1488. The British pound climbed 0.5 percent to $1.3159.

The Japanese yen climbed 0.3 percent to 113.06 per dollar. The yield on 10-year Treasuries sank five basis points to 3.18 percent, the biggest tumble in two weeks. Germany’s 10-year yield declined one basis point to 0.43 percent. Britain’s 10-year yield was unchanged at 1.527 percent. West Texas Intermediate crude fell 0.2 percent to $62.10 a barrel, its eighth straight decline. Gold climbed 0.5 percent to $1,233.42 an ounce.

Coming Up

The Federal Reserve’s next rate decision is Thursday. While policy makers are expected to leave borrowing costs unchanged, observers will be looking for any signals on how much more tightening remains. China trade data come Thursday, with gauges of consumer and factory prices expected on Friday. India is closed for a holiday Wednesday.

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