Dollar slips as investor hopes for stimulus dim

Many judge Democrats winning the House reduces the prospect of further fiscal boost

US midterm elections have delivered a divided Congress. (Photograph: Karsten Moran/The New York Times)

US midterm elections have delivered a divided Congress. (Photograph: Karsten Moran/The New York Times)

 

The dollar eased and Treasuries rose early 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 reaction across markets was far more subdued than when Donald Trump won the presidency in 2016.

The yield on the benchmark 10-year Treasury slipped 4 basis points to 3.19 per cent, while the two-year yield was 1 basis point lower at 2.91 per cent. In foreign exchange markets, the dollar index, a broad gauge of the US currency, was down 0.3 per cent at just above 96.

Meanwhile, US stock futures oscillated but were up 0.2 per cent in early morning trading in London. Trading volumes in these futures contracts is typically light at this hour, accelerating as the Wall Street open nears at 9.30am New York time. In Europe, the government bond markets tracked Treasury yields lower, albeit with smaller moves. The yield on the 10-year German Bund was down 1 basis point at 0.42 per cent.

“The initial asset-market reaction has been a somewhat weaker dollar, lower yields and flattish equity-market futures,” noted Steve Englander, head of currency strategy at Standard Chartered. “This probably reflects the view that co-operation on fiscal policy is unlikely.”

As investors digest the result, they will soon turn their attention to Thursday’s meeting of policymakers at the Federal Reserve, where chair Jay Powell is presiding over a tightening in monetary policy and has signalled more is to come.

Americans cast their votes 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 is at risk.

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.

However, they point out that “the likely drivers of strong historical post-election performance — declining political uncertainty and easing fiscal policy — may be less likely in the current US political environment.”– Copyright The Financial Times Limited 2018.