Tags: midterm | elections | investors | market

Markets Will Make Snap Reaction to Midterms Regardless of Results

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Tuesday, 06 November 2018 08:30 AM Current | Bio | Archive

It’s Midterm Elections Day

U.S. citizens head to the polls today for the midterm elections, except that they don’t really. Early voting has become common in recent years, so at least part of the election is already over.

The market is looking for policy gridlock. The focus is if Democrats can win the House, with other eyes on how the Senate shifts.

Gridlock would mean a further significant fiscal stimulus would be relatively unlikely. Gridlock also means the tax cuts won't become permanent. The dramatic increase in the deficit at least won't get any worse, at least not worse at a faster pace.

It is also generally assumed that a Democrat House would increase investigations into the Trump Presidency. That has consequences as time is a “finite” resource in government, especially in an administration that has rather a lot of vacancies. Time spent speaking to lawyers is time not spent doing something useful.

The uncertainty around these midterms comes from the highly unusual level of turnout that has been evident in early voting with female and youth voting seemingly far higher than normal.

Typically, people do not turnout for midterm elections. The fact that they are doing so in size this time around, does make the outcome harder to predict.

Anyway, whatever results come out, a knee-jerk reaction in the markets is in the cards.

U.S.-China Trade Talks

China’s Vice President Wang Qishan told Bloomberg’s New Economy Forum in Singapore that China remained ready to discuss solutions to its trade war with the U.S.

Nevertheless, Wang’s remarks were somewhat mixed as he warned China wouldn’t again be “bullied and oppressed by imperialist powers,” underscoring fears by business and political leaders on hand that rising nationalism in both countries would be harder to manage.

Anyway, Trump has asked cabinet officials to outline the terms of a possible deal, as was reported last Friday.

Chinese officials have given no indication they’re ready to meet key U.S. demands, such as halting forced technology transfers or rolling back support for state-owned enterprises.

This is not an easy position to read, as the focus of trade would now seem to be on the U.S. side of the negotiations.

Trump told a campaign rally Monday in Fort Wayne, Indiana, that he believed he would reach a deal with Xi, “but a fair deal -- fair deal. There’s a difference. No bad deals.”

If the negotiations continue from their current stance, then U.S. consumers are likely to face higher import tariffs on January 1.

Brexit Deal Discussions Continue

The UK Cabinet meets today again to discuss the “cutting” of the European Union (EU) from the UK’s single market.

British officials have now given up hope of making enough progress this week in order for a special summit of EU leaders to be called to sign the divorce deal on November 17, according to one person familiar with the situation. But they’re still aiming to have a deal ready by the end of the month, so it could go through Parliament by Christmas.

For investors it could be interesting to keep in mind that, if, and that’s still a big “if," a Brexit deal could be achieved, investment, confidence and the British pound (GBP) could all get a sizable boost.

Investors could do well not forgetting that the UK is still the fifth most important economy in the world when measured by nominal GDP.

Euro Area Growth Weakens Further

Euro area business activity is growing at its slowest rate for over two years and expectations have slumped to the bleakest since the end of 2014.

An export-led slowdown, linked to growing trade tensions and tariffs, has been exacerbated by rising political uncertainty, growing risk aversion and tightening financial conditions. The slowdown has consequently become more broad-based to increasingly envelop the services economy.

Italy has recorded an especially noticeable slowdown, slipping into negative growth during October, whilst Germany has also seen a worrying easing of growth, with both countries affected by rising political uncertainty, of which investors should better take not of.

Euro Area Industrial Producer Prices

Industrial producer prices in the Euro Area increased 0.5 percent month-over-month in September, following an upwardly revised 0.4 percent rise in August. Year-on-year, producer prices jumped 4.5 percent in September, the most since February 2017.

The evidence is that European exporters are not willing to eat into their profit margins in order to offset the tariff increases.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Anyway, whatever results come out, a knee-jerk reaction in the markets is in the cards.
midterm, elections, investors, market
Tuesday, 06 November 2018 08:30 AM
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