E Markets: Splits

Markets love certainty, but Asian exporters get no relief as the US vote makes clear trade policy issues will remain in play. The US mid-term elections proved pollsters right with the House swinging to the democrats 219 vs. 193 republicans, while the Senate remains with 51 republicans, 2 independents and 43 democrats and 4 races too close to call. The common wisdom won with gridlock in US Congress seen as stalling new spending, helping US bonds and stocks while hurting the USD. Not everyone agrees and the role of US government spending and the growth trajectory of the economy will be in play with Pelosi as Speaker of the House. Of course there were plenty of other stories overnight to consider for driving markets – 

  • New Zealand had an outsized jobs report putting the RBNZ easing hopes to the side. 
  • China had an bigger drop in FX reserves suggesting more intervention in October and less hope that 7 holds for the CNY.
  • Japan’s parliament passed an $8.3bn supplement to the budget for natural disaster recovery after earthquake and typhoons. 
  • Germany had a stronger industrial production gain adding to 4Q growth bounce hopes.

These stories matter but not to the broader mood of risk-on and a clear path to year-end rallies for equities in Europe and the US. The risk of is in the EUR today with the euphoria ignoring the ongoing Italy, UK and German political issues. A weaker USD helps US growth, slows Europe and it maybe the wrong medicine for the FOMC and the ECB. Markets like voters are split on what they really want growth without inflation or taxes. EUR 1.13-1.15 has been the prison, and no one is sure if today is a real breakout watching 1.1555 for 1.1610 test. 

Question for the Day: Is this about China or about the US deficit next? Moods are still tender regarding US rates and China trade as issues that could derail the nascent November bounce back for equities. The US federal deficit is clearly in play again as the democrats control the house and push back on the Trump agenda with infrastructure spending one place for agreement, but tax increases to pay for it likely to follow. Lifting the deficit ceiling with be the next battle with March 2019 the deadline. 

On the other hand, the pressure the US tariffs put on China coupled with its own debt and stimulus efforts leave the USD/CNY dancing closer to 7 than back to 6.80.  Markets are wary of the upcoming trade report tomorrow and the risks for a harder line from Trump now that the election has left him with the Senate and less trouble than many “blue wave” talkers expected. The WSJ highlights the need for China to keep foreign money flows coming to offset some of the US pain. 

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