Dollar gains as Donald comes up trumps

Markets are responding to counting in the US presidential election. Donald Trump currently leads the way, winning two swing states and ahead in others, and on course for victory, with Republicans also regaining control of the Senate (the House is still a close call). The initial reaction in markets is predictable enough, with the dollar gaining ground and US bond yields and equity futures higher. The currency has strengthened by a couple of cents versus the euro and sterling to trade at about $1.0740 and $1.2870 respectively this morning, which leaves EURGBP a touch lower just under £0.8350. US 10-year yields have jumped by almost 15bps to 4.40%, though this just takes them back to yesterday’s highs (before they retreated to end broadly flat on the day), while equity futures point to gains of around 2% at the open later today. Notwithstanding the rise in US yields, German bond yields are lower this morning, led by a decline in 2-year yields which have fallen by the best part of 10bps, while UK yields are down marginally.

While the focus will remain on politics for another while, the Fed begins a two-day monetary policy meeting today. Though the economy continues to grow at a solid pace, inflation has fallen close to target and the labour market is cooling (evident in declining job vacancies and moderating wage growth), which should allow the Fed to cut rates again, probably by 25bps (following its 50bps reduction in September), as it continues to ‘navigate’ its way towards a more neutral setting for interest rates.

The ISM index of services activity in the US rose for a third consecutive month in October, pointing to ongoing expansion in this sector of the economy. Meanwhile, the latest estimate from the Atlanta Fed puts the current ‘run-rate’ for GDP growth in Q4 at 2.4%, only marginally below the Q3 outturn of 2.7%.

It is relatively quiet on the economic data front today, with the October construction PMI due in the UK and a final reading for the October services PMI scheduled in the Euro area. A number of ECB members are due to speak over the course of the day.