After an early slide last night following the stunning news that Doug Jones had defeated Republican Roy Moore in the Alabama special election, becoming the first Democratic senator from Alabama in a quarter century and reducing the GOP’s Senate majority to the absolute minimum 51-49, US equity futures have quickly rebounded and are once again in the green with the S&P index set for another record high, as European stocks ease slightly, and Asian stocks gain ahead of today’s Fed rate hike and US CPI print.
“The big issue now is whether Republicans will push through their tax bill before Christmas,” said Sue Trinh, head of Asia foreign-exchange strategy at RBC Capital Markets in Hong Kong. “And more broadly, U.S. dollar bulls will be more worried that this marks a Democratic revival into 2018 mid-term Congressional elections.”
The negative sentiment faded quick, however, because according to Bloomberg, despite the loss of a Senate seat, it probably won’t affect the expected vote on business-friendly tax cuts, however, as the winner won’t be certified until late December.
Yet despite the bullish reversal in equities where the BTFD algos quickly arrived, the Bloomberg Dollar Spot Index fell for the first time in eight days after the Jones victory, ending its longest winning streak since January 2016. That said, the market has largely forgotten Alabama by now, and will focus on the Fed’s forward guidance as the central bank is widely expected to raise interest rates on Wednesday, with Treasuries slipping in the London session. The USD Index is just clinging on to the 94.000 marker and paring broad basket losses made in the wake of Alabama’s election result. However, the next major directional move (towards 94.500 or 93.500) will likely come from the FOMC tonight, notwithstanding CPI data after Tuesday’s firmer than forecast PPI readings
Ironically, the narrative that a Democrat won Alabama for the first time in decades is bullish for stocks did not reach Europe on time, and the continent struggled to match Asian gains as investors awaited policy decisions by central banks on the continent and in America. Most European bonds followed Treasuries lower as the dollar retreated. European stocks were fractionally lower (Stoxx 600 -0.1%) with a gain in retail shares, led by U.K. electronics retailer Dixons Carphone Plc, was offset by a drop in food and beverage companies and household goods names. Zara owner Inditex SA is among the best performers on the European gauge after signaling that sales growth is rebounding this quarter after weakening to the slowest pace in more than three years. An earlier technical problem that delayed the opening of all futures and options trading on Eurex, Europe’s largest derivatives market, has been resolved.
Earlier, solid gains in Asia overnight inched MSCI’s 47-country world index up for a fifth day running and while the pre-Fed anticipation meant Europe’s main bourses were barely budged, there was action elsewhere as stocks in Australia, South Korea and Hong Kong rose, while stocks in Tokyo fell. U.S. equities posted fresh all-time highs overnight after data showed signs of inflation in producer prices. Australia’s ASX closed +0.1%, kept in a tight range while Japan’s Nikkei 225 (-0.5%) was dampened by a firmer JPY, as focus centred on the developments in US which was a blow for President Trump and effectively tightens the passage for tax reforms. Hang Seng (+1.1%) outperformed and Shanghai Comp. (-0.1%) was choppy as liquidity efforts by the PBoC – which injected net funds via reverse repo for a 3rd day – were counterbalanced amid the backdrop of the risk events stateside.
The Alabama vote temporarily seized the spotlight away from the Fed, which will raise rates later by 25bps to between 1.25 and 1.50 percent, its third hike of the year and fifth since the financial crisis. Oppenheimer’s Brian Levitt suspects the Fed will also revise up its growth forecast, adding upside risk to the “dot plot” forecasts on interest rates, though he does not expect as many hikes next year as some economists.
“We are going to see a Fed that continues to attempt to tighten policy next year,” he said. “But fortunately with inflation low in the U.S. the Fed has the cover to go slowly… I know people have hopes for the tax cuts (planned by Trump), but I don’t think they will be able to push ahead with 3-4 rate hikes.”
As a result, comments on the outlook for 2018 will be the focus for investors as they weigh the impact of coming policy normalization on global asset prices, while it’s anticipated that the ECB will reveal details of plans to taper asset purchases on Thursday.
Meanwhile, more Brexit drama as UK PM May is being urged by some of her allies to consider the possibility of a cabinet reshuffle in order to build on her recent Brexit success, the FT reports, with the Times adding that the BoE should leave interest rates unchanged this month following November’s historic increase.Italian PM Gentiloni was on the wires saying that the next Brexit talk phase will be more challenging and called for a tailor-made trade deal between EU and UK. Separately, Labour said it will back Dominic Grieve’s amendment giving Parliament a proper say on the Brexit deal if he pushes it to a vote tonight. The terms of our future are not for the government alone to determine, according to the shadow Brexit secretary
Elsewhere in Europe, La Repubblica reported that Italian parties have agreed to hold elections on March 4th.
With the Fed looming, global rates were largely unchanged: the yield on 10-year Treasuries increased one basis point to 2.41%, reaching the highest in almost seven weeks as 10-year Bund yields gained two basis points to 0.33%, the highest in more than a week; Britain’s 10Y Gilt yield climbed one basis point to 1.202%.
In commodity markets, oil was nudging back towards two-year highs hit in the previous session on an unplanned closure of the pipeline that carries the largest volume of North Sea crude oil. Brent crude added 0.8 percent, or 51 cents, to $63.85 a barrel, after shedding 2 percent on Tuesday. U.S. crude added 0.7 percent, or 38 cents, to $57.52, after slipping 1.4 percent overnight. Gold was near its weakest level in almost five months at $1,242.18 an ounce. It is often seen as a safe-haven play and can perform poorly when central bank’s like the Fed feel confident enough to raise interest rates.
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