After all the expectation and anticipation, the US mid-term elections ultimately passed without much impact on the markets. The market had been widely expecting a divided Congress to be the outcome and that is exactly what we got with the Democrats gaining control of the House and the Republicans retaining, and extending, their majority in the Senate.
As is always the case with political events or indeed any market risk events such as key economic data releases, the most widely expected result is the one which induces the last reaction and this time around was no different.
USD Trades Lower
We saw USD trading a little softer following the results which is in line with the historical tendency of USD to soften in the aftermath of the mid-term elections when the President’s party loses control of a chamber of Congress. Indeed, looking at mid-term elections since 1994 shows that USD tends to weaken by around 4.5% in the 180 days following the election so it will be interesting to see if we get a similar reaction this time around.
Equity Markets Rallying Strongly
However, equity markets have been rallying hard following the election, though in actuality, they were rallying ahead of the election also. The reason for this is the optimism around a potential trade deal between the US and China, fuelled by positive commentary from President Trump over the last two weeks.
Indeed, following the elections results Trump wrote on Twitter
“Received so many Congratulations from so many on our Big Victory last night, including from foreign nations (friends) that were waiting me out, and hoping, on Trade Deals…Now we can all get back to work and get things done!”
Trump Reacts With Positivity (For Once!)
Of course, Trump didn’t say who these foreign nations are, but on the back of his recent comments, the market is more than happy to assume he is referring to China. The reaction to Trump’s tweets also suggests a sense of relief as there was an argument for thinking that in the wake of losing control of the House, which now effectively side-lines Trump’s power when it comes to changing domestic policy, that the President might revert back to a more aggressive stance on trade. So, learning that the president intends to continue to pursue a trade deal with China has fuelled a relief rally among investors.
As usual, the Trump administration spin machine has been in full swing and has painted the mid-term elections as a success for the GOP, focusing on the extended gains in the Senate rather than the loss of control in the House.
Ronna McDaniel who is the Republican National Committee Chairwoman reacted to the results by saying that the Republicans had won as they “turned the forecasted Democrat tsunami into a ripple.”
The USD Index is now sitting just below 2018 highs after recently trading to fresh highs on the year last week. Price found support at a retest of the broken bearish trend line from 2016 highs and is still above the rising trend line from 2018 lows which means, for now, the focus remains on further upside with the 96.86 level the key topside level to watch.
The S&P has been rallying hard over the last week and a half and is now challenging resistance at the 2803.08 level. If price can hold above this zone, the 2878.24 level will be the next key objective ahead of the 2940.04 highs. To the downside, the key support zone is around the 2603.49 region where the recent sharp decline stalled and reversed.