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Will the US midterm elections result in a political Gridlock? - EMEA Brief 6 Nov

DanielaIG

  • The US Dollar is holding within tight margins as investors are showing discretion ahead of the US Midterm elections that take place today.
  • The Dow closed up 190.87 points at 25,461.7 and the S&P rose 15.2 points closing at 2738.31 led by the financial and energy sectors.
  • The Nasdaq fell 0.38% lower at 7328.85 as Apple and Amazon both fell more than 2%
  • Apple has had its second downgrade since its earning report last week, as Rosenblatt Securities followed Bank of America Meryll Lynch in downgrading Apple from buy to neutral. After this second downgrade, the stock fell 2.8% to $201.59, accumulating a loss of 9.2% since the earnings report. 
  • Berkshire Hathaway earnings beat expectations after announcing a $1billion buy-back, sending a strong signal to the market, and closing on Monday at $216.24, up 4.68%
  • Italian Bank shares have suffered a hit as Banco BPM fell 3.4%, UniCredit fell 1.6%, Ubi Banca fell 1.8% and Intesa Sanpaolo fell 2.2% on the back of Goldman Sachs downgrade on Friday. The drop in Italy’s main banks shows a continued uncertainty of the country´s short-term future as the government continues to challenge the European fiscal rules.
  • Inflation has risen 15% yoy in Turkey after pressure to lower interest rates in order to induce spending and economic growth to overcome the country´s “currency crisis”.
  • Uranium prices have hit a 2.5 year high as producers have started to invest in new plants as the demand for nuclear power increases. The price of Uranium has risen by 40% from its lows in April. 
  • Crude oil prices continue to fall as continued sanctions and concerns over economic slowdown take their toll on carb fuel demand.

Asian overnight: A mixed Asian session has seen the Chinese markets providing the sour note on an otherwise bullish period. Japanese household spending tumbled to -1.6% against expectations, while the RBA kept rates unchanged as widely predicted. However, with recent volatility to consider, the session has been a largely positive and stable one for Japanese and Australian stocks in particular.

UK, US and Europe:  The midterms are the general elections that are held near the mid-point of a president's four year term of office, it is a combination of elections for the US Congress, governorship and local races. The results will be seen as a sentiment towards Trump's presidency and his accomplishments, and historical results show that disgruntled voters use the midterms to punish the party in power.

Whilst the Us economy is booming with low unemployment rates, Trump's tax cuts for corporations have increased the country's deficit by 33% in the last year. Immigration will be a decisive issue in the voting taking place today, as the Democrats have tried to pull in minority votes by criticizing Trump's "zero-tolerance" policy towards immigration.

It is expected that the markets have already factored in an increase in “blue representatives” as it is expected that Democrats will regain control of the House of Representatives and the Republicans will maintain the Senate, resulting in a government gridlock, which has historically seen positive reactions from the US equities markets.  The extent of the gains will depend on the potential change in the House as it has decision over social and economic structures. A result that gives the Republicans full control could be seen as positive for the equity market as there could be further fiscal stimulus and tax cuts. On the other hand, if the democrats gain control of both the House and Senate, which is seen as less likely, would likely lead to a negative sentiment in US equities as they could reverse some of the policies in place to boost the short-term economy. An equally impactful situation on the markets would unfold if the future representatives is left unclear after the elections as uncertainty would affect the market sentiment.

It is likely that the US Dollar could rally if the result of the elections give full control to the Republicans as Trump's economy boosting policies will continue. On the other hand, the US dollar is expected to fall in the short-term if the elections result in a political gridlock, with the dollar taking further hits if the Democrats regain full control.

Economic calendar - key events and forecast (times in BST)

Market.PNG

Source: Daily FX Economic Calendar

21.45pm - NZD Unemployment rate for the 3rd quarter: expected to fall from 4.5% to 4.4%.

Corporate News, Upgrades and Downgrades

  • Wm Morrison saw Q3 sales rise 5.6%, with positive like-for-like for three-years. Interestingly, the wholesale business is also a big performer, growing 4.3%. Same store growth came in at 1.3%.
  • Randgold Resources saw Q3 profitability rise after a round of cost cutting (down 10%), with profits for the three months to September rising 21% on-year to $73.2m. Much of that period saw the company’s Tongon mine in Ivory Coast on strike. Randgold shareholders will vote on Wednesday after a takeover bid from Barrick Gold.
  • DS Smith expects to see a first-half operating profit well ahead of the previous year's result, as the company continues to raise prices to account for increased input costs.

KPN upgraded to Buy from Neutral at BofAML

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