Wall Street opened sharply higher Wednesday after midterms elections saw the Democrats take control of the House of Representatives and Republicans tightened their grip on the Senate.
The three main stock indices extended their recent rebound, with the S&P 500 climbing 1 per cent with minutes of opening trade as investors expressed relief that the midterm results came in largely as expected and threw up no major surprises. The Dow Jones Industrial Average tacked on 0.6 per cent while the Nasdaq Composite gained 1.2 per cent.
A split Congress all but eliminates the prospect that President Donald Trump will be able to push through further tax cuts. But at the same time it also means Democrats will have a hard time rolling back the corporate tax reforms and financial deregulations that have bolstered growth over the past year.
“From a market point of view . . . Republican success in the Senate should reassure investors that there has been no significant ‘lurch to the left’ by the US electorate and that, as such, the current Administration’s pro-business policies will remain in force, providing ongoing support for the domestic economy,” said Mark Sherlock, head of US Equities at Hermes Investment Management.
Some analysts see infrastructure as one area of possible compromise between Republican and Democratic lawmakers. Libby Cantrill, Pimco’s head of public policy, said an agreement on infrastructure spending offers “more potential for an upside surprise . . . than the markets are pricing.”
Others meanwhile are hoping that a political gridlock will force President Trump to find a resolution to his trade dispute with China. Sectors that have been hit hardest by the tariff war saw some relief on Wednesday, with Caterpillar up 1.5 per cent while agricultural equipment makers Deere & Co rose 1.4 per cent.
But the dimming prospects of further stimulus have also prompted some in the markets to dial back their expectations on the pace of US interest rate tightening. This in turn is knocking the dollar lower on Wednesday and boosting Treasury prices.
The DXY index, a measure of the buck against a basket of major trading peers, is down 0.4 per cent. Yield on the 10-year note, which moves in opposition direction to price, was 2.7 basis points lower at 3.1875 per cent.
Technology stocks, which have bore the brunt of October’s sell-off amid concerns over rising rates and slowing growth, also bounced on Wednesday. The NYSE Fang + index was 1.5 per cent higher. Within this Amazon gained 3 per cent, Netflix added 1.5 per cent, Alphabet climbed 1.7 per cent while Apple edged 0.6 per cent higher.
“From an interest rate perspective, while rates have indeed declined on dwindling expectations for major fiscal stimulus (and accordingly, an accelerated path of policy normalisation), the path of least resistance for rates should be higher as markets refocus their attention to the growth/inflation backdrop in the US and the Federal Reserve’s desire to move rates higher, albeit very gradually,” said Candice Bangsund, vice-president and portfolio manager at Fiera Capital.
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