US equity futures jumped, the dollar dropped and Treasuries climbed as investors seemed to cheer on an outlook for political gridlock in the wake of the American midterm elections.
Risky assets were in favour after results showed Democrats winning control of the House of Representatives and Republicans holding on to the Senate. The outcome dims chances for any more tax cuts or other major fiscal initiatives from the administration that might have pushed yields higher. Overall, investors are betting that the election results won’t do much to disrupt an economy growing at a healthy 3 percent clip.
The outcome largely matched polling going into the vote, and it’s likely investors will now refocus their attention on other issues. The biggest macro theme remains the trade war after recent warnings from major names including the IMF’s Christine Lagarde and former US Treasury Secretary Hank Paulson. Meanwhile, the Federal Reserve is set to decide interest rates on Thursday, and Theresa May is pushing on with efforts to agree a Brexit deal.
Elsewhere, European stocks rallied and Asian shares were mixed. Shares of Spanish banks surged after they escaped paying billions of euros in back taxes. The euro rallied as data showed German industrial output picked up steam in September.
Futures on the S&P 500 Index climbed 0.7 percent as of 8:38 am New York time. The Stoxx Europe 600 Index rose 1 percent to the highest in four weeks. The UK’s FTSE 100 Index rose 1.2 percent. Germany’s DAX Index rose 0.8 percent. The MSCI Emerging Market Index rose 0.7 percent. The Bloomberg Dollar Spot Index decreased 0.4 percent to the lowest in three weeks. The euro rose 0.5 percent to $1.1483. The British pound rose 0.3 percent to $1.3143.
The Japanese yen climbed 0.1 percent to 113.28 per dollar. The yield on 10-year Treasuries fell two basis points to 3.2 percent. Germany’s 10-year yield rose two basis points to 0.45 percent. Britain’s 10-year yield rose one basis points to 1.54 percent. West Texas Intermediate crude surged 0.8 percent to $62.72 a barrel, the first advance in more than a week. Gold added 0.3 percent to $1,230.50 an ounce.
Terry Haines, strategist at Evercore ISI: “This is a market-friendly outcome, but less so than if Republicans had held on to both houses. We think markets likely view this outcome as positive since it removes the risk of an all-Democratic Congress, and the increased Republican Senate majority offers additional assurance that the 2017 tax cuts would not be rolled back in 2021 in the event of a Democratic president.”
David Solomon, Goldman Sachs’s CEO: “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.”
Steve Englander, global head of G10 currency research at Standard Chartered: “The chance of major policy initiatives is low, as more time will be spent on scoring political points. But the risk that
the 2020 election could produce a sea change in policy is also reduced.”
Nader Naeimi, head of dynamic markets at AMP Capital Investors in Sydney: “For global markets and the global economy as a whole, I think this was the best outcome. When you look at the pressure on the US dollar, the expectations of more fiscal spending in the US 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.”