Morning Commentary: Congressional Gridlock – Day 1

Foreign Exchange - Morning Commentary

Congressional Gridlock – Day 1

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
Last night’s election results generally met expectations with the House flipping over to Democratic control and the Republicans gaining a few seats in the Senate. Regarding market psychology, when results meet expectations, the market reaction is usually muted as markets are always forward looking and have already price in that result.
That is not the case for today’s markets but one day’s reaction is not a trend. Today is Day 1 of the post-election reaction and so far equity markets are viewing gridlock as a positive and the U.S. dollar is weaker against almost all major and emerging market currencies with the exception of the Mexican peso (concerns Democrats will revisit the new USMCA agreement). While global equities are all outperforming and U.S. equities opening higher, global interest rates are near unchanged.
Most interesting regarding U.S. interest rates is the fact that 2-year rates are higher while 10-year rates are lower today. Market expectations regarding the Fed raising interest rates in December moved up further overnight.  Currently the probability of another rate hike stands near 80%, up from nearly 71% just one week ago. Longer term rates are more concerned with less stimulus and the potential for weaker growth down the road.
Initial reactions to major economic and political events are difficult to gauge. Sometimes they are the catalyst for major momentum and directional changes that can last weeks and months and other times they are only a short term positive or negative effect that lasts 24-48 hours. More time will be needed to determine the outcome of the election on the markets but I would suspect that the reaction we are witnessing today is not a game changer and markets will normalize in short order.
  • Oil prices are down nearly 19% from the recent peak of $76 seen just one month ago. Oil prices have been in a bull market since the low of nearly $40 seen in January 2016. A 20% drop would indicate that prices have entered a bear markets. That would be good news for those of us who live in California where gasoline prices are the highest in the country.
  • New Zealand posted a great jobs report for the Q3 reporting cycle. The UR rate dropped dramatically from 4.5% to 3.9% which is a 10-year low and the labor participation rate rose from 70.9% to 71.1%. Wage growth was also solid. NZ interest rates moved sharply higher and the NZ dollar is outperforming. The Reserve Bank of New Zealand meets later today but expectations remain for interest rates to remain unchanged.
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