How Did the Markets React?
European markets moved to preempt the
US session on news that the
Democratic Party took back the majority in the House of Representatives and that
they were within arms length of taking the Senate as well. The reaction in the
markets was relatively muted, however, as the true resolution of the
US election may not be known until
after the Thanksgiving holiday when all of the votes will be ratified. As we
noted earlier this morning, “The difference between a mere win of the House of
Representatives and a complete capture of both chambers can be significant for the Democrats as one would allow
them to merely block some of the excess of President Bush legislative agenda,
while the other would actually allow Democrats to overturn parts of Bush’s
policy.” Nevertheless, equity markets reacted to the news first, gapping sharply
lower at the opening bell while European fixed income and FX markets started to
show gains after a quiet Asian session.
Bonds – German 10-Year Bunds
European fixed income markets rose in
line with action in US Treasuries, which gained for a third day after Democrats
won control of the House of Representatives, giving them substantially more
power to block government spending increases and to reverse tax cuts.
Furthermore, the Democratic Party is only two seats away from the six needed to
gain a majority of the Senate, so the markets will be anxiously awaiting results
out of Montana and Virginia. With the
possibility of less expansionary policy being legislated in the
US, the likelihood of
monetary policy tightening in the US is far lower, making it more
difficult for yields to gain. As a result, yields on 10-year German bunds
dropped 6 basis points to 3.725%, while prices surged to a high of 102.20, but
eased back slightly to 102.17.
FX –
EUR/USD
While Germany posted
strong trade surplus figures on the back of a whopping 6.6% gain in exports,
Euro price action this morning was in reaction to news on the greenback side.
EUR/USD posted a meager 10 point gain following the better than expected trade
data from Germany. However, as it became clear
that the Democratic Party had taken control of the House of Representatives,
European liquidity brought the pair to surge to a high of 1.2819 between 9:00
and 10:00GMT. With Democrats in a comfortable lead for the House, the question
remains over the status of the Senate, as the tight race hinges on the outcome
out of Montana and Virginia. As a result,
EUR/USD reactions have been relatively tame, and pending the timetable for the
announcement of the Senate winners (which could be as late as Thanksgiving Day,
when all the votes will be ratified), Euro could give back some its gains
throughout the day.
Equities – Xetra DAX 100
Index
Traders in European equity markets
tried to preempt sell-offs in the US, as Frankfurt’s Xetra DAX 100 Index gapped
about 20 points lower at the opening bell. Shares initially recouped slightly,
but profit taking forced the index down 0.7% to 6,318.43. Indexes across the
globe had gained yesterday in anticipation of a legislative “gridlock” in the
US, which historically leads to
greater profitability on Wall Street. However, now that it appears that the
Democrats have a chance of sweeping both the House and the Senate, traders are
hedging those bets today. Additionally, the Democratic Party is generally
perceived to be less business friendly, which could hurt share prices in the
long term. Trading will likely be choppy throughout the session, especially upon
the entrance of US liquidity, but with the final
tally for the Senate race available potentially as far away as the Thanksgiving
holiday, equities may not feel the true brunt of selling pressure today.
