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The blue wave founders

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Much like my outside reversal calls yesterday, the Democrat ‘blue wave’ appears to have foundered in the Georgia Senate runoff. With around 90% of the votes now counted, both Republican candidates have narrow leads. If the voting finishes as expected, the Senate will have a 52-48 Republican majority.

Futures on the S&P 500, Nasdaq and Dow Jones have been in retreat all morning in Asia, unwinding around half of their overnight gains. A Republican victory I had expected would be positive for markets, almost certainly ending the likelihood of potential tax increases in the United States. However, the flip side of the coin, is that any follow-on fiscal stimulus is likely to be dead in the water. President Biden’s entire legislative agenda will potentially struggle, with the Republicans able to block it in the Senate.

With 10% of the Georgia votes to come, one risk point to note is that an unexpected swing to the Democrats is likely to see a sudden jump in equity markets, given the markets’ reaction this morning so far. It seems that stimulus hopes trump tax increases for now. It seems unlikely, but in 2020/21, it seems anything can happen.

With fiscal stimulus hopes fading faster than Democrat chances of victory in Georgia, stock markets have turned lower in Asia, slipping modestly into the red. The US dollar has rallied modestly after a torrid session overnight, while energy and precious metals markets remain nonchalant about the result. I would expect that once the elections are called, equity markets will regain their poise, with the underlying drivers of the buy everything rally in 2021 still intact.

The Federal Reserve will keep rates at record lows through 2021; the US government fiscal deficit will make for eye-watering reading – although they won’t be alone there – and the arrival of Covid-19 vaccines will accelerate an economic recovery across the world. That will spur ever greater asset price appreciation as the hunt for yield goes on in a zero per cent world. Markets will increase rotation into cyclical markets in Asia and Australasia and Europe. All of which should have the effect of pushing the US dollar lower. An increase in negative real yields in the US, if inflation accelerates, will only give more tailwinds to the lower dollar trend.

Overnight, outperformance by the US ISM Manufacturing PMI spurred a broad market equity rally, coming after the NYSE reversed three China Telco’s’ delisting. The latter story still has drama left in it, but the ISM numbers followed equally impressive prints from Asia and Europe this week. Despite Covid-19’s rampage, manufacturing continues to hold up across the world, hinting that if and when the pandemic ebbs, economic activity across the globe will accelerate once again. That premise was enough to see Wall Street load up on everything.

Energy outperformed after OPEC+ sprung a huge surprise, with Saudi Arabia announcing a unilateral 1 million barrel per day cut in production. That easily offset the 75,000 barrel a day increase granted to Russia and Kazakhstan, and I can honestly say, I didn’t see this outcome coming. Nor did oil markets, which climbed over 5% overnight.

US politics aside, pan-Europe service PMIs are released later today. Covid-19 will have made its presence felt as lockdowns sweep the bloc, but the fallout looks likely to be less than expected. Combined with excellent Manufacturing PMI data already released, there should be nothing here to derail the remorseless grind higher by the euro and other European-area currencies.

The FOMC minutes are released tomorrow morning Asian time, and it would be a major surprise to see anything in them apart from lower for longer. Markets will be looking for insight into how keen the FOMC is to let inflation overshoot while keeping rates low. If the minutes hint at lower for longer, inflation be damned, the US dollar may well be set for another move lower.

Attention will then rotate to this Friday’s US Non-Farm Payrolls data, where we expect an increase of just 100,000 jobs. With stimulus cheques on their way out to Americans, even a much lower print will not sway a Republican Senate from adjusting its stimulus stance. That would likely require a series of terrible numbers into Q1 2020, unlikely at this stage. The Non-Farms always generate a lot of short-term noise in the markets over their release but are unlikely to derail the underlying trends this time around.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Jeffrey Halley

With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley is OANDA’s senior market analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV, Channel News Asia and the New York Times. He was born in New Zealand and holds an MBA from the Cass Business School.

Jeffrey Halley

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