- Obama projected to win the US election by major TV networks.
- Knee-jerk negative market reaction: treasuries higher, US stock futures lower and somewhat surprisingly, the dollar weaker against the euro.
The quite solid projections by major TV networks that Obama will win the US election weigh on financial sentiment this morning. Yields on 10-year Treasurys have dropped seven basis points to 1.67%, albeit after a spike yesterday of the same magnitude. US equity futures have turned red. Note though, that the drop in US equity futures comes after a solid performance yesterday with Dow Jones and S&P500 up 1.0% and 0.8%, respectively. We also witnessed an initial sell-off in the Asian stock markets but most Asian indices are back in green.
The risk-off moves in treasuries and US equity futures are as expected the knee-jerk reaction to the projected Obama win that by many investors is viewed as less business friendly than a Romney victory. The Obama win also makes it more likely that the fiscal cliff concerns will become a major issue in the market the next two months.
Adding to these concerns are the projections that the Republicans will keep the majority in the House of Representative and the Democrats the Senate majority. It means that there is still a clear risk of a political deadlock in the US ahead of the Budget Control Act (fiscal cliff) coming into effect 1 January. Finally, the Obama win should secure that the Fed open-ended easing continues for the foreseeable future, which puts a solid lid on yields.
It is noteworthy that EUR/USD has moved higher this morning despite the drop in risk appetite that would normally support the US dollar. It underlines that the concern that a Romney win would mean a less dovish Fed policy (relative interest rate-channel) has dominated the risk-channel in the FX market. When the major TV networks declared Obama the winner USD/JPY initially dropped to 78.80 but it is now back above 80.00.
The election result will probably - as mentioned above - add to the fiscal cliff concerns in the market. However, we should not forget that the election outcome is in fact in line with most polls and projections over the past couple of days. Hence, the market reaction this morning is in our view also a reflection of investors closing short-term bets that Romney could have surprised the market and won the election.
Bottom-line is that one should be careful not to put too much weight on the market moves this morning. In our view we still have an underlying positive sentiment with the US economy adding jobs, growing signs that the Asian recovery is on track and a Federal Reserve that is now firmly expected to continue its open-ended easing for the foreseeable future. A monetary and economic environment that we consider quite positive for risk-appetite and negative for the US dollar.
To Read the Entire Report Please Click on the pdf File Below.