Only fools rush to judgement ..... so here goes ! The US mid-term elections ......


ref :- General, and everywhere

Just quickly, a knee-jerk reaction to the result of the mid-term elections .... Frankly, it's not the sort of exercise to be encouraged unless you make your living trading this kind of thing. There's a long and inglorious history of commentators reading too much into initial market reactions to events, and you can very easily make yourself a hostage to fortune if things turn around after more thoughtful analysis. Still, despite the dangers let's have a look and see how the markets are taking the breaking news :

As we write, it has become clear that the Democrats have regained control of the House of Representatives for the first time since 2010, and the Republicans have held onto the Senate and may even increase their 51 - 49 majority (though we can afford to look beyond the precise details right now). A Congress split in this way was most people's "base case" scenario, and after a terrible run the pollsters will be relieved to have got one of the big ones about right. So no surprises, but even confirmation that less predictable outcomes have not in fact come to pass provokes some market movement, and in this US - centric case the immediate response so far has been :

US TREASURIES have been marked higher, which of course is to say that yields have been marked lower (about 5 basis points), at the prospect of a Democratic House blocking any attempts by the administration to add yet more stimulus to the economy by making the huge one-off tax cuts a permanent fixture, and indeed to introduce further cuts promised by President Trump whilst electioneering. Such giveaways would require funding and increased issuance of Treasury Notes and Bonds. Confirmation that the already huge deficit is not to be increased in this way comes as a relief to bond markets.

The US DOLLAR has been marked lower ..... the market takes the view that further fiscal stimulus to an economy already barrelling along at great speed (pouring petrol on the fire ?) would have forced the Federal Reserve to tighten monetary policy even more aggressively than it already is. Faster interest rate rises (and of course higher longer-term yields) would of course have encouraged increased inflows into the US unit. The weaker dollar this morning is a function of the fact that for now at least that particular scenario has been avoided.

US STOCKS have been marked higher by about 0.8% , or rather US stock market futures have. We'll have to wait for the US opening to find out whether the underlying exchanges confirm, increase or reverse such a reaction. Whatever the case, it's not such an obvious call as the other two asset classes. In the normal way of things, more fiscal stimulus would be beneficial to stocks -- the last round of tax cuts supercharged share prices. So now that a split Congress looks to have ruled that out, why are stocks stronger ? The two most common explanations amongst the hundreds of talking heads on financial media this morning seem to be :

1. that the election result was as expected and well-signposted .... unloading of stocks had already taken place and was a contributing factor to the October downturn. Today's action is a case of the old phenomenon " Buy on rumour, sell on fact" .... or in this case "Sell on rumour, buy on fact"

2. whisper it quietly, but investors may actually be quite relieved to see the checks and balances that a Democrat House brings to the party, and to Mr Trump's more reckless instincts. His stated intentions would surely be another big boost to prices in the short-term, but may come at a big cost further down the line.

We never need reminding that by the time many of you read this, there's a not inconsiderable chance that everything will have changed. That could of course leave us and many others looking a bit foolish. But if nothing else the danger of knee-jerk reactions will have been perfectly illustrated .... and that in itself would be a lesson worth learning.

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