US Midterm Elections Dollar Lower As Results Trickle In

08:10 GMT / 16.10 SGT / 19.10 AEDT

With 29 seats still to be declared, the Democrats are just 5 short of flipping the House. The Democrats taking the House of representatives is as good as certain. The markets are looking towards 2 years of political gridlock and judging by the initial market reaction, equites appear to be pleased about the prospect of a divided government. 

Financial market dislike change and political gridlock will mean that there won’t be much change. This will leave the markets to focus on the most important factors – the Fed and trade war. Once the dust settles the prospect of a move lower is still exists. Normally gridlock supports equities, this could be different under Trump as favourable corporate policies could also be off the table.

The dollar remains lower on the day trading 0.2% lower versus a basket of currencies at the time of writing.  The prospect of fewer expansionary fiscal policies potentially cooling the Fed’s outlook is weighing on demand for the buck. 96.00 has been providing support, however the dollar is moving below at the time of writing opening the door for a move down to 95.50.

05:10 GMT / 13.10 SGT / 16.10 AEDT

US futures have pared gains and the US dollar has taken a hit in early trading on Wednesday, as midterm election results trickle through. Results are still coming in at the time of writing, so nothing is set in stone. However, as expected, it is starting to look like the Republicans will retain control of the Senate, whilst the Democrats could clinch the House of Representatives. So far, the Democrats have broadly performed as expected, holding seats that they were expected to hold and the same with Republicans.

Dollar Dips
The more convinced that the market becomes that the Democrats will flip the House, the lower the dollar has been falling across the board. The euro hit a high of $1.1473 versus the dollar within the past hour, up 0.35% on the day. The dollar has also fallen versus the Japanese Yen to a low of 112.97. This is interesting because the dollar had managed to retain its strength versus the yen moving into the elections despite falling against other majors. So we are seeing signs of nerves creep in as traders move towards safer havens.
Whilst the Fed would be expected to stick to with its plan to raise rates in December, regardless of the results tonight. The expectation is for inflationary pressures to just ease slightly going forward under a divided government which would explain the broader selloff in the dollar. 

US Futures Trim Gains
Wall Street closed higher overnight as election momentum lifted the Dow 173 points, whilst the S&P and Nasdaq closed almost at session highs. However, volume was notably thin as investors opted to sit on the side-lines ahead of the midterm results.

The US futures have continued where US equity markets left off. Futures are reacting in a volatile session to results as they come in. The S&P futures had gained as much as 0.4% overnight and this was trimmed to just 0.15% as Democrats picked up as many as Republican held seats. Democrats need to pick up 23 Republican seats in order to flip the House and this is looking like it could be a reality. 

The historical assumption is that stocks generally perform well under a divided government and its resultant political gridlock. Given that markets don’t like change, usually political gridlock is considered positive for US stock markets. However, this time round it is different. Political gridlock is will mean a slowing of market friendly policies such as deregulation and tax cuts. 

Asian Markets Erase Gains

Asian markets were largely higher in early trade as investors watched US election results come in. However, the positivity didn’t last with Asian stocks erasing gains.
For Asian markets it is not just about the results today, but about how the prospects of the trade war weigh up going forward. The most trade war friendly outcome for these elections would have been a blue sweep. Democrats taking the Senate and the House. The markets now know that this is not going to happen. The Republicans have as good as retained the Senate meaning Trump’s hostile trade polies could continue.  This is weighing on sentiment in Asia in later trade.