Stocks and bonds off the hook for a spell

Bearish dollar news can be a tonic for shares for the remainder of the week.

Summary

Bearish dollar news can be a tonic for shares for the remainder of the week.

Long cheer for gridlock

Stock markets remain a uniform sea of green from Paris, Amsterdam, Warsaw and more. U.S. indices have taken the baton from futures equating to gains of 0.6%-to-0.8%. In other words, investors’ assessment of how ‘gridlock’ could disrupt the administration’s fiscal agenda has kept dollar buyers in retreat for most of Wednesday. In turn, the swing in equity market sentiment looks well-founded and robust.

Havens see upticks

All major currencies have now been elevated for most of the day and Treasurys have stayed in demand. There’s a hint of safety in the bid for 10-year notes. See a 74-tick yield drop from the early hours to Europe’s open. The yield loss remained above 6 basis points at last look. In theory, haven demand was also reflected in USD/JPY’s almost simultaneous drop with Treasurys, and remaining bid. But there’s no such bid for the yen against the euro or sterling. And equity moves are just as definitive on the upside. Cross-Atlantic gauges have almost all been about a percentage point or more ahead from the start. The U.S. risk touchstone, VIX, posts its biggest slide for the month so far. Near-confirmation that the Democrats take more than 30 House seats to lift their tally above 228 (crushing the 23 required), for now, translates into more plain sailing ahead for stocks.

What could possibly go wrong for stocks

The key reality checks are 1. ample scope for Republican disruption and 2. disappointed fiscal hopes. Emboldened Dem. attempts to rein in President Donald Trump’s still ambitious slate and push harder for investigations, may face myriad retaliatory tactics. The Republicans may reach for the roadblock gambit, causing more shutdowns. True, these have bogged the dollar and yields down in recent history, but not necessarily shares. But any hint of a pause or even an unambiguous, if marginal, impact on growth is less likely to receive as sanguine a reception from investors as the last full Washington shutdown received. On the fiscal front, if Tax Cuts 2.0 fails to materialise, this will also nix an offset for consumers vs. rising average tax rates and toughening loan rates. Generally, such outcomes do not favour smooth equity market advancement. Should the opposition also push through increased investigations of the President, and these attempts trigger aggressive Republican push back, Wall Street’s nascent recovery trend may fail to clinch its ultimate prize, a return to milestones marked earlier in the year.

Mid-terms offer S&P 500 late-year vault

In the nearer horizon, with mid-term elections out of the way, U.S. shares have cleared a key obstacle. Simple technical chart optics show the S&P 500 returning to the clean line that ran from January 2016 to  October this year. Weekly momentum oscillators are also favourable. We don’t need to ‘believe’ in technical analysis to understand that S&P 500’s return above the line is a widely anticipated eventuality. If it occurs in the short term—a possibility for which we see decent probabilities—a positive-feedback reaction will be all grist to the stock market mill. Amid a relatively quiet equity and macroeconomic calendar, at the very least, we’re comfortable predicting momentum effects could keep Wednesday’s positive sentiment going for the remainder of the week.

Technical analysis chart: S&P 500 index – weekly intervals 07/11/2018 15:13:28

Source: Refinitiv/City Index


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