How Did the Markets React? <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
European markets moved to preempt the <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />US session on news that the Democratic Party took back the majority in the House of Representatives and that they were within arms length of taking the Senate as well. The reaction in the markets was relatively muted, however, as the true resolution of the US election may not be known until after the Thanksgiving holiday when all of the votes will be ratified. As we noted earlier this morning, The difference between a mere win of the House of Representatives and a complete capture of both chambers can be significant for the Democrats as one would allow them to merely block some of the excess of President Bush legislative agenda, while the other would actually allow Democrats to overturn parts of Bushs policy. Nevertheless, equity markets reacted to the news first, gapping sharply lower at the opening bell while European fixed income and FX markets started to show gains after a quiet Asian session.
Bonds German 10-Year Bunds
European fixed income markets rose in line with action in US Treasuries, which gained for a third day after Democrats won control of the House of Representatives, giving them substantially more power to block government spending increases and to reverse tax cuts. Furthermore, the Democratic Party is only two seats away from the six needed to gain a majority of the Senate, so the markets will be anxiously awaiting results out of Montana and Virginia. With the possibility of less expansionary policy being legislated in the US, the likelihood of monetary policy tightening in the US is far lower, making it more difficult for yields to gain. As a result, yields on 10-year German bunds dropped 6 basis points to 3.725%, while prices surged to a high of 102.20, but eased back slightly to 102.17.
FX EUR/USD
While Germany posted strong trade surplus figures on the back of a whopping 6.6% gain in exports, Euro price action this morning was in reaction to news on the greenback side. EUR/USD posted a meager 10 point gain following the better than expected trade data from Germany. However, as it became clear that the Democratic Party had taken control of the House of Representatives, European liquidity brought the pair to surge to a high of 1.2819 between 9:00 and 10:00GMT. With Democrats in a comfortable lead for the House, the question remains over the status of the Senate, as the tight race hinges on the outcome out of Montana and Virginia. As a result, EUR/USD reactions have been relatively tame, and pending the timetable for the announcement of the Senate winners (which could be as late as Thanksgiving Day, when all the votes will be ratified), Euro could give back some its gains throughout the day.
Equities Xetra DAX 100 Index
Traders in European equity markets tried to preempt sell-offs in the US, as Frankfurts Xetra DAX 100 Index gapped about 20 points lower at the opening bell. Shares initially recouped slightly, but profit taking forced the index down 0.7% to 6,318.43. Indexes across the globe had gained yesterday in anticipation of a legislative gridlock in the US, which historically leads to greater profitability on Wall Street. However, now that it appears that the Democrats have a chance of sweeping both the House and the Senate, traders are hedging those bets today. Additionally, the Democratic Party is generally perceived to be less business friendly, which could hurt share prices in the long term. Trading will likely be choppy throughout the session, especially upon the entrance of US liquidity, but with the final tally for the Senate race available potentially as far away as the Thanksgiving holiday, equities may not feel the true brunt of selling pressure today.
