Wall Street stock futures and Asian shares lost steam on Wednesday after Democrats won control of the U.S. House of Representatives, boosting the party’s ability to block President Donald Trump’s political and economic agenda.
But European stocks were expected to rise, with spread-betters looking at gains of up to 0.5 percent in Britain’s FTSE, 0.8 percent in France’s CAC and 0.7 percent in Germany’s DAX.
The Democrats’ House win creates a hurdle for Republicans to easily pass legislation through both chambers of Congress, clouding the outlook for some of Trump’s key economic proposals.
Major U.S. broadcasters projected the Democrats were headed to a gain of more than 30 seats, well beyond the 23 they needed to claim their first majority in the House in eight years, while the Republicans were seen gaining a few more seats in the Senate.
While both outcomes were broadly in line with market expectations, a reason markets did not sell off, the prospect of political gridlock creates some uncertainty for investors. The dollar weakened against most of its major counterparts.
“In the short term, a Republican loss in the House should amplify risk market volatility, detract from positive sentiment, and be positive for U.S. rates,” said Ed Al-Hussainy, senior rates and currency analyst at Columbia Threadneedle Investments at Minneapolis in the United States.
“Long dollar and short Treasury futures positioning is relatively stretched going into tonight and could exaggerate short term moves in these prices,” he added.
In addition, the newly empowered House Democrats will have the ability to investigate Trump’s tax returns, possible business conflicts of interest and allegations involving his 2016 campaign’s links to Russia.
In equities markets, U.S. S&P500 futures ESc1 last traded 0.1 percent higher and MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS were up a similar amount, but they were far off highs hit earlier.
Japan’s Nikkei ended down 0.3 percent, giving up morning gains.
“It has clearly become difficult for Republicans to pass additional tax cuts or amendments to Dodd-Frank regulations (on financial institutions) for instance,” said Tomoaki Shishido, fixed income analyst at Nomura Securities.
Market sentiment had been volatile in Asian trade with stocks and the dollar swinging on the Republicans’ fluctuating prospects of retaining the House.
While a split Congress would put a brake on Trump’s agenda, such as tax cuts or deregulation, some investors think the Democrats may agree to more spending.
“There are still areas with compromise for spending, so even with a split government I expect more fiscal stimulus ahead. There is some possibility for compromise on infrastructure spending as well,” said Steve Friedman, New York-based senior economist at BNP Paribas Asset Management.
“If there is additional fiscal stimulus, it suggests that fiscal policy is more of a tailwind for U.S. growth and it should, all things equal, be supportive for stocks.”
On the other hand, many investors expect Trump to continue to take a hard line on tariffs, which he can impose without Congressional approval, and foreign policy.
That keeps alive worries about a trade war between China and the United States.
Trump’s massive tax cut, enacted in December, and a spending agreement reached in Congress in February have helped lift the U.S. economy, but they have also widened the federal budget deficit.
As a result, Treasury supply has been growing, pushing U.S. bond yields higher.
The election results pushed down the 10-year U.S. Treasuries yield about 2.5 basis points to 3.189 percent, off its seven-year high of 3.261 percent touched a month ago.
But the debt market also remains under pressure from this week’s record volumes of longer-dated government debt supply.
In the currency market, the dollar dipped.
Against the yen, it was 0.3 percent lower at 113.13, reversing earlier gains to one-month high of 113.82 yen.
The euro rose 0.15 percent to $1.1446 and the British pound gained 0.1 percent to $1.3117, hitting a three-week high.
Sterling extended gains made the previous day on hopes of a Brexit deal breakthrough after Brexit Secretary Dominic Raab said “Thumbs Up” on his way out of a cabinet meeting.
That helped sterling recover losses following remarks from a senior member of the Northern Irish Democratic Unionist Party earlier that it looked like Britain would exit the EU without a deal.
Oil prices were soft after a 2 percent fall the previous day. U.S. crude futures hit an eight-month low as Washington granted sanction waivers to top buyers of Iranian oil and as Iran said it has so far been able to sell as much oil as it needs to.
U.S. West Texas Intermediate (WTI) crude CLc1 futures traded 0.6 percent lower at $61.85 a barrel having hit a low of $61.31 on Tuesday, the weakest price since March 16.
International Brent crude LCOc1 futures fell 0.25 percent to $71.95, after hitting a low of $71.18 on Tuesday, its lowest since Aug. 16.
Japan’s Central Bank Sitting On Assets Worth More Than The Country’s Entire Economy
An epic bond-buying spree by Japan’s Central Bank means it’s now sitting on assets worth more than the country’s entire economy.
Data released by the Bank of Japan on Tuesday show that its total holdings stand at about five-fifty-three trillion Yen that is 4.9 trillion Dollars. The figure is bigger than Japan’s annual Gross Domestic Product (GDP) at the end of the second quarter and more than five times the size of Apple’s market value.
The years of heavy stimulus have warped parts of Japan’s financial markets and left the central bank with dwindling options to juice growth if a new crisis hits. But the splurge is unlikely to end anytime soon.
The US federal reserve’s total assets are about one fifth of the size of US GDP, and the European central bank’s are around 40% of the Eurozone economy.
PDP Responds To Osinbajo’s Debt Claims
The People’s Democratic Party, along with former President Goodluck Jonathan, has broken its silence over comments made last week by Vice-president Osinbajo, assailing the party on the way they handled economy and on alleged corruption.
Osinbajo said on Tuesday that the former president ruined the Nigerian economy and left the country with huge debt and hardship as a result of alleged corruption under his watch.
One of Jonathan’s aides released a statement that such accusations should not come from Osinbajo whom he claims was recently indicted by the House of Representatives for an alleged corruption.
The statement says fingers should not be pointed at Jonathan whom he says is celebrated internationally for his efforts at achieving Nigeria’s best rating in Transparency International’s Annual Corruption Perceptions Index.
He accused the current government of increasing the nation’s debt because it lacked the discipline of the former President.
Mnangagwa Defends “Painful” Economic Reforms
Zimbabwean President, Emmerson Mnangagwa, has defended what he called painful economic reforms. He says the policies are necessary to get the country out of economic stagnation. He said, “yes, the medicine is harsh, but the patient requires it in order to live”.
Mnangagwa says his administration has identified privatisation of state institutions, broadening of the tax base and fighting corruption as key to turning the economy around.
He also defended a two percent levy imposed on electronic transactions which make up around ninety-six percent of all financial transactions. He said, that will enable them to reduce the budget deficit.
He highlighted increasing output in gold mines and privatisation of the agriculture sector as some of the positive developments in Zimbabwe since he came to power.
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