Dollar loses ground as Democrats take Congress and US policy making set for stalemate
There were only modest moves across FX, equities and oil prices for much of yesterday as markets awaited the outcome of the US elections. For much of the day, the dollar was relatively steady at a little below $1.12 to the euro and a little above $1.34 to sterling. With the election results coming in overnight and the Democrats taking both the House and Senate comfortably in a rebuff of the Trump administration, the dollar has weakened, with the euro now trading at $1.1240 and sterling at $1.3480. The scene looks set for stalemate now, as President Trump retains veto power to stifle any Democratic-led legislation he does not agree with while at the same time he will not be able to get more of his agenda through a Democratic House and Senate. His Cabinet will also face much more intense scrutiny with the potential for impeachments and Congressional investigations. EURGBP is relatively unchanged at around 83.4p. In equity markets, tech stocks staged a modest rebound yesterday, but that was enough for the S&P to snap a three-day losing streak and end the day up 0.4%, while in Europe the Eurostoxx reversed some of Monday’s gains and ended down 0.5%. Oil edged down a little again, with a barrel of Brent crude down 1% to $103; however, it’s edging back up today as, with the midterms over, the result may embolden President Trump to strike again at Iran, especially before the new Congress sits in January.
There were several hawkish ECB speakers out yesterday, which supported euro yields backing up. Curves steepened, with German 2-year yields up 2bps and 10-year yields up 4bps to 3.33%, while French 2-year yields were up 3bps and 10-year yields up 5bps to 4.95%. There was a little less movement in US yields, with 10-year yields more or less unchanged at around 4.95%. However, bond yields on both sides of the Atlantic are dipping on the open this morning.
There were a number of ECB speakers out, with most pushing the message that a rate hike is coming. Bundesbank President Nagel said that rates will ‘probably’ have to be raised at the December meeting, adding that the inflation picture had worsened since September and that higher energy prices were raising the risk of second-round effects. Bulgaria’s Radev said that the pause at the last meeting does not mean that tightening is over and the ECB should not wait for evidence of second-round effects before acting again. Klass from the Netherlands said tightening is slowing the economy and second-round effects are not yet visible, but short-term inflation expectations are rising. Kocher from Austria was also out to say the ECB must ensure inflation does not become entrenched.
US factory and durable goods orders for September were broadly strong yesterday. The final data showed durable goods orders were up 1.9% on the month and factory orders up 1.8%, while in year-on-year terms both are up over 10%. While AI-associated demand is still the driver, transportation orders were also strong in September, pointing to continued underlying manufacturing momentum heading into Q4.
Today, there will be the fallout from the US elections for markets to digest, while on the data front we get final October PMIs in major economies, the flash October inflation print in the Euro Area and ISM services in the US. Speakers include ECB chief economist Philip Lane.