There is an impasse in the US Congress that crystallizes after the midterm elections. With this fact, financial markets can now focus on the issues that really worry them – the Federal Reserve policy and the US-China trade war. These two key factors will ultimately determine whether Wall Street and global stocks can improve their performance after a poor performance in October.
The midterm election results are likely to lead to a weaker dollar and stable yield on bonds, which will have a positive impact on capital markets.
One very important result of today is the separation of power in Congress and the diminishing prospect of additional financial incentives. When the early results gave Republicans an unexpected opportunity to retain their positions in the House of Representatives, opening the door to a second round of tax cuts, the bond yields jumped briefly and the value of the dollar rose.
One key point is that the campaign for the presidential election in 2020 is starting now. The Democrats are unlikely work on stabilization of the economy and help Donald Trump to be re-elected.
This means that the US economy will enter in 2019 without any new tax cuts. In turn, this provides prerequisites for reaching the end of the Federal Reserve’s interest rate hikes cycle.
For developing markets loaded with heavy debts in US currency, these are good news. In terms of ratings, the global non-US shares look much more attractive than Wall Street. The first stage of tax cuts from Trump led to a serious divergence between the United States and the rest of the world in terms of economic performance.
If the tightening of the Fed policy slows and the growth of the global economy is accelerating, the gap between the US and other countries will narrow significantly.
The investors’ attention is now focused on the last Fed meeting that will take place on Thursday. We can expect a new message for the further rise in interest rates in December, the same month, in which the European Central Bank is expected to end its bond purchase program.
The year will come to an end against the decisions of two big central banks to withdraw from the easy money policies.
Then, at the end of November, the markets will be thirsty awaiting the G20 summit in Buenos Aires, where Donald Trump and Xi Jinping will take steps to ease tensions between Washington and Beijing.
Trading remains problematic, which was noted by many US companies during the current reporting season.
The slowdown in the growth of the Chinese economy and the weakening of the yuan also had a negative impact on the sentiment of investors.
Donald Trump is unlikely to step down from his firm stance on China. The US president has enough support in this respect from a number of Democrats, so occupying the House of Representatives would not have any influence in this respect.
The rivalry between the US and China is likely to go on a more intense stage, and if we do not see some relief in this area, markets will face unclear prospects in the coming months.