How US Midterm Elections Triggered Market Gains and Oil Price Crash
Market Reactions and Economic Impacts Following the US Midterm Elections
By Jamie McGeever
ORLANDO, Florida, Nov 4 (Reuters) - Investors put money to work on Wednesday, piling into stocks, bonds, non-dollar currencies and gold following historic US midterm elections that saw the Democrats win control of both houses of Congress from President Donald Trump's Republican Party. The widespread bullishness was also fueled by a steep fall in global oil prices.
In my column today, I look at the part high inflation and the affordability crisis played in the US midterm elections, which ended in one of the biggest defeats for an incumbent Republican president in living memory.
Today's Key Reads
• Democratic sweep adds new twist to markets' Iran, AI, and debt worries
• Election stiffens the Fed's guardrails, but independence risks remain
• US trade deficit narrows slightly in September; imports hit record high
• ECB rate hike looks nearly certain after inflation rises to three-year high
• Global central banks hit pause in October after September hiking spree
Key Market Moves
• Today's Key Market Moves STOCKS: Japan -1.5%, China +2.3%. Europe +1.8%, UK +1%. Brazil +1%, snaps six-day losing streak. Nasdaq +1.4%, S&P 500 +1.6%, Dow +3%.SECTORS/SHARES: Nine sectors on the S&P 500 rise, two fall. Five sectors +3% or more, consumer discretionaries +4.2%. Energy -4.8%. Data center, defense shares fall. Big healthcare stocks post double-digit gains, but CVS -12.5%.FX: Dollar lowest since September 30. Emerging FX rallies, especially Mexican and Chilean pesos. Bitcoin +3% above $80,000.BONDS: German bund yield lowest in two months, 30-year gilt yield posts biggest fall since May, 10-year yield lowest since July. US yields down 3-7 bps across the curve.COMMODITIES/METALS: Oil tumbles, Brent, WTI -8%. Gold +3.5% back above $4,000/oz, best day since August 19.
Today's Talking Points
Political Gridlock and Market Sentiment
Gridlock, schmidlock
Wait, aren't political gridlock and a "lame duck" president in Washington meant to be bad news for stock markets? Not if Wall Street's whoosh on Wednesday is anything to go by. As news of the Democrats' "clean sweep" hit the wires late on Tuesday night, Nasdaq futures were down as much as 2.5%. The tech-heavy index closed Wednesday up nearly 1.5%, and the Dow had its best day since April last year.
As it turns out, the certainty of knowing who controls what in Washington for the next two years is rather welcome. It offers a sense of predictability, and reduces the likelihood of more radical policies being implemented. If so, the political backdrop is calmer. Also, history shows market performance in the second year of a presidential term is often weak, so the bar for recovery after the midterms is low. Will this time be different?
Oil Price Plunge and Geopolitical Factors
Game-changer oil?
We're only at the midpoint of the week, but the plunge in oil prices on Wednesday puts Brent and WTI crude futures on course for their biggest weekly decline since the white heat of the global pandemic in April 2020. Brent is down nearly 20% so far this week, WTI is down 15%. This will cool inflationary pressures and, ceteris paribus, is bullish for stocks and bonds.
Trump admitted that the unpopularity of the Iran war was a major factor in his party's defeat. He also said this week that the US will stop its $4 billion annual funding of Israel after this year. Meanwhile, Qatar has stepped up mediation efforts to end the US-Iran conflict. Could an end to the war finally, this time, be in sight? The oil market is trading as if it is.
Central Banks and Currency Markets
Take it to the Bank
The Bank of England decides interest rates on Thursday, and is expected to finally join most of its G10 peers in raising borrowing costs to combat inflation. It would be the Bank's first hike in more than three years. The UK already boasts the highest real rates in the G4, so a hike would widen that gap even further. Around 100 basis points of tightening is priced in by the end of next year, rates futures markets show.
Good news for sterling? Probably. The pound rose to a seven-week high against the dollar on Wednesday, and is close to testing $1.35. It is hovering around its highest level against the euro since March last year. FX strength will help cool inflation, but won't do much to narrow the trade deficit.
Upcoming Economic Events
What could move markets tomorrow?
• Germany industrial orders (September)
• Euro zone producer price inflation (September)
• Norway interest rate decision
• Bank of England interest rate decision
• Federal Reserve officials scheduled to speak include Cleveland Fed President Beth Hammack and Richmond Fed President Thomas Barkin
Newsletter and Disclaimer
Want to receive Trading Day in your inbox every weekday morning? Sign up for my newsletter here. Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(Reporting by Jamie McGeever; Editing by Nia Williams)