US economy

Dollar falls as midterm results dim stimulus hopes


The dollar fell and stocks and Treasuries rose on Wednesday as the US midterm elections delivered a divided Congress that many investors believe quashes the prospect of a further injection of stimulus for the American economy.

Investors and traders have paid close attention to the elections given a Republican-controlled Congress pushed through corporate tax cuts that electrified the dollar and an ageing bull market in stocks while sending government bond yields higher.

With Democrats retaking control of the House of Representatives and Republicans set to tighten their grip on the Senate, as opinion polls had suggested, the fallout was more subdued than when Donald Trump won the presidency in 2016.

The reaction in the fixed income and currency markets was enough to buoy equities, with lower yields and a softer dollar offering a helpful backdrop for the stock market.

“Asset markets could well react positively to the combination of the Democratic swing in the popular vote and a Republican Senate advantage that may be hard to beat,” noted Steve Englander, a strategist at Standard Chartered. “Tax cuts are likely to stay in place, but there is little risk of further policy measures that would steepen the path of future deficits.”

Wall Street’s S&P 500 rose 0.9 per cent at the open in New York. European stocks also made gains of around 1 per cent, led by financial and resource stocks.

The yield on the benchmark 10-year Treasury slipped as much as 4 basis points to 3.19 per cent, while the two-year yield was 1bp lower at 2.91 per cent. In foreign exchange markets, the dollar index, a broad gauge of the US currency, was down 0.5 per cent at just under 96, a two-week low.

Investors had anticipated stronger gains for equities if the Republicans had hung on to the House and sought to pass more economic stimulus. But historically, markets have warmed to the policy gridlock that often results from a divided Congress.

Lena Komileva, a chief economist at (g+) economics, said that a divided Congress might ultimately prove more benign because “adding more fuel to the economy with a fresh fiscal stimulus, when there is already little spare capacity left and inflation risk is on the rise, would have risked rapid rises in US yields and the dollar risking another recession”.

The period after midterm elections has, since the early 1970s, been a buoyant one for US stocks, with the S&P 500 generating average returns of 12 per cent between the start of November and the end of the first quarter, according to Goldman Sachs.

Americans went to the polls just days after the US stock market suffered its worst month since 2011, as a combination of higher bond yields, a slowing global economy and the trade war between Beijing and Washington fed fears that the decade-long bull market was at risk.

While there was investor relief on Wednesday that Democrats had failed to take the Senate, it was a backdrop that left few prepared to forecast a banner final two months for stocks given the trade dispute.

James Athey, senior investment manager at Aberdeen Standard Investments, predicted markets would move quickly to speculate on how this result might embolden Trump’s foreign policy, since it was the most obvious area where he could operate largely without Congressional support.

“Their focus will probably be on this month’s G20 summit for signals of which way he’ll turn now on the trade war with China, or indeed how willing China might now be to return to the negotiating table,” Mr Athey said.

Attention was also turning to Thursday’s meeting of policymakers at the Federal Reserve, where chairman Jay Powell is presiding over a tightening in monetary policy and has signalled more is to come.

See the live midterm election results here.



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