November 7, 2018 / 11:56 AM / 9 days ago

INSTANT VIEW 6-Investor reaction after Democrats capture U.S. House majority

LONDON, Nov 7 (Reuters) - Democrats rode a wave of dissatisfaction with President Donald Trump to win control of the U.S. House of Representatives in midterm elections on Tuesday, giving them the opportunity to block Trump’s agenda and ramp up scrutiny on his administration.

Two years after his surprise win of the White House, Trump and his fellow Republicans expanded their majority in the U.S. Senate, following a divisive campaign marked by fierce clashes over race, immigration and other cultural issues.

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How U.S. markets are expected to open later

MARKET REACTION: STOCKS - U.S. S&P 500 e-mini futures were up 0.9 percent. MSCI’s all-country world index was up 0.45 percent. BONDS - The 10-year U.S. Treasuries yield sat near a session low at 3.185 percent.

DOLLAR - The US dollar index was down 0.65 percent at a near 3-week low. The euro, the yen, the Swiss franc, sterling and for emerging markets, the South African rand, made the most pronounced gains.

KENNETH J. TAUBES, CIO OF US INVESTMENT MANAGEMENT, AMUNDI

“We do not expect any significant immediate market reaction, however the prospect of key legislation will determine future market evolution.”

“Fixed income markets could come under some pressure if the President and Congress approve a new stimulative fiscal program however we expect 10 year yields to remain around the current levels in the coming months.”

“For equities, the historical precedent has been for markets to underperform ahead of the midterm elections and then rally until year-end. We expect this trend to be confirmed.

“Moving towards 2019, equity markets will shift their focus more to fundamentals such as earnings sustainability. The outlook is still positive for US equity in 2019, but with a strong focus on selection as the economic and financial cycle mature.”

DEEPAK PURI, CIO AND HEAD WD AMERICAS, DEUTSCHE BANK WEALTH MANAGEMENT

“In previous U.S. Administrations where the President was Republican and the Congress was split (Republicans with a Senate majority and Democrats in control of the House of Representatives), the S&P 500 historically has generated a total return of around 10.8 percent (going back to 1933).”

“Encouragingly, the S&P 500 has also not declined in the 12 months after a midterm election going back to 1946... however, the historical precedents did not feature trade conflicts, so the next 12 months might be different.”

LARRY HATHEWAY, CHIEF ECONOMIST AT GAM INVESTMENTS

“For investors, gridlock over the next two years is potentially positive, insofar as it removes a considerable amount of legislative, tax and regulatory policy uncertainty. The initial market reaction - mostly higher overseas share prices - is consistent with this view.”

“At this juncture it remains premature to draw strong conclusions. Insofar as potential escalation of trade conflict remains a key concern for global growth and the performance of non-US equity markets, investors will likely remain hesitant until further clarifications of policy intent are forthcoming. In that context, the ongoing bilateral discussions between China and the US will become a key focal point.”

KOJI FUKAYA, PRESIDENT, FPG SECURITIES, TOKYO

“The key questions for the currency market after today is, will the Trump administration be able to keep pursuing policies to stimulate the U.S. economy, and will there be a shift towards China over trade?”

KYOYA OKAZAWA, HEAD OF INSTITUTIONAL CLIENTS APAC, BNP PARIBAS, HONG KONG

“The Japanese market is resilient as it has priced in the result which was widely expected, but the impact from the election results could gradually pressure the market.”

“Investors will gradually realize that Democrats are hard on China as well, so what has been a worry to the financial market won’t change even after the midterm elections.”

DOUG BIBEN, FOUNDER AND PORTFOLIO MANAGER AT BCM, LOS ANGELES

“It was a good enough night for the president ... there wasn’t a ‘Blue Wave.’ I think it was a pretty good night for the markets and the U.S. economy. If we were to see fiscal stimulus, it would come in the form of infrastructure. That could be the big stimulus coming if you can put together a coalition. You can’t spin a tax cut politically for the rich but infrastructure is about jobs. I think that is the likely scenario.”

JUAN PEREZ, SENIOR CURRENCY TRADER, TEMPUS, INC, WASHINGTON

“Things fell as expected, so we have to see if the House will affect the trade conflict. This really was what markets priced-in. We may see some recovery from major counterparts, but that alludes more to a natural recovery after the greenback gained by over 2.5 percent throughout October.”

ED AL-HUSSAINY, SENIOR RATES AND CURRENCY ANALYST, COLUMBIA THREADNEEDLE INVESTMENTS, MINNEAPOLIS

“A break of 1.13 in euro/dollar and 3.25 in 10-year Treasury yields are significant short-term technical levels. We are watching for potential spillover effects to other risk assets. In the short term, a Republican loss in the House, although in line with consensus expectations, should nevertheless amplify risk market volatility, detract from positive sentiment, and be positive for US rates.”

“We are confident that these overnight moves will have next to no bearing on the medium-term direction of asset prices as participants digest the final outcome and the 2019 legislative agenda starts to take shape over the next several months.”

MICHAEL PURVES, HEAD OF EQUITY DERIVATIVES STRATEGY, WEEDEN & CO, NEW YORK

“The surprise was that there was no surprise. I think everyone was bracing for any possible, crazy scenario to show itself, but it basically looks like the baseline consensus forecast was correct. If the futures are up now and they stay up it’s because there is an uncertainty factor that is now out of the market.”

JOHN VAIL, CHIEF GLOBAL STRATEGIST, NIKKO ASSET MANAGEMENT, NEW YORK

“The GOP increased its majority in the Senate by several seats, which will make confirmations of judges and administration officials easier and overriding his vetoes harder. It will also make conviction of Trump, if impeached by the House, less likely.”

MASAAKI KANNO, CHIEF ECONOMIST, SONY FINANCIAL HOLDINGS, TOKYO

“To the extent that political uncertainty disappears, the market is likely to be risk on, which means stock prices in the U.S. will likely rise and dollar/yen will be at least stabilized or may rise a little bit.”

JON HILL, US RATES STRATEGIST, BMO CAPITAL MARKETS, NEW YORK

“The return to political gridlock in Washington will likely serve to temper growth expectations, or at least moderate the prospect of additional stimulative fiscal policy. However, we don’t anticipate this to dissuade the Fed from continuing to deliberately tighten monetary policy as other areas of the economy maintain very strong momentum. This combination presents an additional impetus for the (Treasury yield) curve to move flatter from here.”

MOHANNAD AAMA, MANAGING DIRECTOR, BEAM CAPITAL MANAGEMENT LLC, NEW YORK

If one attributes part of the nearly 10 percent drop (in S&P 500) last month to a pricing-in of a worst case outcome then we may be looking at a slight, albeit short-lived, rebound in the days ahead.”

“Now that the elections are behind us, earnings and the Fed will be back in focus. All indications are that neither of those factors support expanding multiples for stocks.”

RAY ATTRILL, HEAD OF FX STRATEGY, NATIONAL AUSTRALIA BANK, SYDNEY

“The markets were geared for the Democrats winning the house. Now, we are seeing the dollar selling off as it looks certain that Democrats are in fact taking the house. This is almost exactly in line with expectations and polls.”

“Trump has still got trade and policy levers and he is more likely to go harder on trade now. That’s our opinion. He will potentially extend tariffs to all Chinese imports by February. We’ll wait to see how this plays out.”

STEVE FRIEDMAN, SENIOR GLOBAL ECONOMIST, BNP PARIBAS ASSET MANAGEMENT, NEW YORK

“In terms of major economic implications, I think importantly, two things don’t change. One is the 2016 tax law changes. With divided government, Democrats will have no ability to roll back any of those measures. And second, trade policy. Because the president has significant authority over trade policy and can move forward without Congress on tariffs.”

“If the domestic agenda is blocked as a result of divided government, Trump could actually pivot more aggressively towards trade because that’s an area where he’s less constrained and he feels like it resonates with his base ... And whether it’s good economic policy or not, I think Democrats are hard pressed to stand up too aggressively to the President on trade policy.”

“I see scope for additional spending measures passed by Congress. That’s because both parties have signaled support for an infrastructure program. Now, there are significant differences in terms of how large it should be, how you pay for it. And the role of the private sector in infrastructure spending. But the will is there, so I think that’s one area where markets might be under-pricing the risk of stimulus.”

JUSTIN WARING, INVESTMENT STRATEGIST, UBS GLOBAL WEALTH MANAGEMENT, NEW YORK

“Some parts of the U.S. equity market could begin to face headwinds over concerns about the tone coming from the Democratic House committees. For example, Representative Maxine Waters looks poised to chair the House Financial Services committee. She has long opposed deregulation efforts for financials.”

“In our view, there is a very low chance of increased regulation under this Congress, but markets will begin to fret about ‘what dreams may come’ if Democrats win a follow-up victory in 2020. Even so, we continue to recommend an overweight to financials. Despite potential perceived headwinds from House committee hearings, there are bigger factors at play, and political considerations are unlikely to override the fundamentals.”

Compiled by Marc Jones in London, Americas and Asia markets desks

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