Markets
US Democrats pulled it off. They swept both the House and the Senate and did so with wider than expected margins. The shift of power in the House was near-certain in advance, but the Senate was meant to be a toss-up. Not so, early flips in deep-red states like Kansas, Texas, Ohio and South Carolina are projected to give Democrats a comfortable majority in both aisles of US Congress. A current net gain of 7 Senate seats could become an 8 or even 9 gain resulting in at least a 55-45 majority from a Democratic point of view. Also in governor election races, Democrats managed a net gain. In a phone call with the WSJ, US President Trump didn’t challenge the validity of the results. He admitted that “Iran was a piece of it” as to why Republicans scored so poorly. The biggest issue according to Trump was obviously that he wasn’t on the ballot. Winning the House allows Democrats to block legislation backed by the US President and install oversight investigations (which ultimately and potentially could end up with impeachment procedures). Also winning the Senate hands them veto power over high-level executive and judicial appointments. With Trump threatening to turn into Mr. Veto as well when it comes to Congress legislation, the US government risks becoming a lame duck in the final two years of Trump’s presidency.
We’ve witnessed some wild swings overnight as election results filtered through. Asian stock markets and US equity futures initially suffered steep losses with the AI trade under most pressure. The narrative being that the current administration has been very (regulatory) friendly in supporting the AI build-out. In the same vein, Bitcoin lost quite some ground early on. However, as the session continued a lot of those losses were erased and even flipped towards gains. We err on the side of cautiousness when reading into these turnarounds. The reaction function of US Treasuries and the dollar was related to the equity moves, in the same way as we saw more often earlier this month. AI-inspired risk-off weighed on the dollar and drove haven flows into US Treasuries. As equity markets started recovering, so did the dollar while US Treasuries ceded ground again. Again, it’s way too early to draw final conclusions on potential directional market moves as we wait to see how European and especially US investors take the verdict. The initial gut feeling suggested lower US credit risk premium across asset classes as the Democratic sweep clips the wings of an utterly erratic US domestic and international policy, but stock markets seem to become the needle in the market compass. In retrospect, one might ponder how much of the AI sell-off since early October was effectively due to often touted financing concerns. It could have just as well been positioning into a Democratic sweep with this morning’s market reaction the outcome of a sell-the-rumour, buy-the-fact trade.
The election narrative takes center stage today, but we still mention the interesting eco calendar including ECB wage tracker, October EMU CPI numbers (upside risks), US non-manufacturing ISM, ADP employment report and the US Treasury’s quarterly refunding announcement.
News & Views
New Zealand employment over the third quarter fell by 0.1% q/q, coming after a downwardly revised 0.3% growth in Q2. The y/y gauge fell from 0.9% in Q2 (1.2% before the revision) to 0.7%, which is weak from a historical perspective. The employment rate fell to 66.4%, the joint-lowest (with 2020Q3) in a decade. The unemployment rate unexpectedly rose to an 11-year high of 5.7% and the participation rate retreated from 70.6% to 70.4%. The latter is among the lowest levels in 10 years. Wages (incl. overtime) rose 0.5% q/q and 2.1% y/y, picking up slightly from 2% in Q2. The labour market report douses speculation about a December rate hike by the central bank. The RBNZ kept rates unchanged at 2.75% last month after a tight 4-3 vote. Governor Breman later said that chances for a hike at year-end were high, prompting a rise in tightening bets to 90%. That’s dropping to 60% today. Short-term kiwi yields tumble more than 10 bps. NZD/USD trades slightly higher nevertheless with US dollar weakness outweighing a soft NZD. The pair changes hands near the 0.56 big figure.
US Treasury earlier this week announced a $618bn borrowing estimate for the fourth quarter. That’s $10bn lower than projected in August due to a higher-than-assumed starting cash balance, which is partially offset by lower projected net cash flows. Treasury assumes a cash balance of $850bn by end-December and issued a first $800bn borrowing projection for 2027Q1. The department today announces more details on auction sizes. Expectations are for a shift from longer-dated maturities to lean more heavily on T-bills and short- and medium-term coupons.
