08 Nov

Stock indices show optimism ahead of US congressional elections

November 8, 2022

By JustMarkets

At Monday’s close, the Dow Jones Index (US30) increased by 1.31%, while the S&P 500 (US500) added 0.96%. Technology Index NASDAQ (US100) gained 0.85% yesterday.

Goldman Sachs told its clients on Monday that there is still a 35% chance of a recession in the US over the next 12 months. While that is twice the normal recession risk, it is well below the average of 63%, according to a recent survey by The Wall Street Journal. A Bloomberg Economics model released in late October determined that the risk of recession over the next 12 months is a staggering 100%. A probability model developed by Ned Davis Research also revealed a 98.1% chance of a global recession. But GS analysts believe the Federal Reserve can still make a soft landing for the US economy. The bank also expects the Gross Domestic Product to grow by about 1% over the next year.

Today is the US Congressional elections. Many traders and investors underestimate this event, categorizing it as political. But it should be noted that this election is at stake for control of Congress and President Joe Biden’s agenda for the remaining two years of his term. Republicans are leading in the polls, and many analysts believe the likely outcome will be a split government, with the Republican Party controlling the House and possibly the Senate in the second half of Biden’s term. If this scenario takes effect, the US will not be able to provide financial support in the economic downturn. It would also affect the prospects for government spending, which could be reallocated to other needs. Historically, the markets like it when there is a “Democratic President” and a “Republican Congress.” This has been the case for most of Obama’s and Clinton’s terms. The S&P 500 Index is up 73% and 181%, respectively. But that’s in the long-term run. If to take the short-term picture, the opposite is true. So, a government split could cause the dollar index to spike, the European currency to fall, and stock indices to plummet. In other words, if the Republicans win, the odds increase that inflation will be suppressed in the short term. But it increases the likelihood of a sharper, though shorter, recession.

Stock markets in Europe traded higher yesterday. Germany’s DAX (DE30) gained 0.55%, France’s CAC 40 (FR40) added 0.01%, Spain’s IBEX 35 Index (ES35) increased by 0.25%, and Britain’s FTSE 100 (UK100) closed down by 0.48%.

The government of the Eurozone spent 200 billion euros to support the energy stability in the region. Analysts believe the move will support economic growth but lead to further inflationary increases.

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The European Central Bank should continue to raise interest rates, even at a slow pace, until core inflation, which excludes energy and food prices, begins to decline, said Governing Council member François Villeroy de Galhau. Villeroy said he expects overall inflation to peak in the first half of 2023 and begin to decline, probably starting next spring.

The situation in the oil market remains tense. There are multidirectional factors acting on oil, from OPEC+ countries cutting production to G7 countries setting a restrictive price in response to Russia’s invasion of Ukraine. There is also the factor of China and its restrictive policy, and there is the factor of crude oil reserves and energy shortages in Europe. Plus, monetary policy and the dollar index, the growth of which negatively affects oil. Such a mixture of factors all at once led to the difficulty of forecasting the price of oil. Therefore, it is worth relying on more than just fundamental indicators now.

Asian markets were mostly on the rise yesterday. Japan’s Nikkei 225 (JP225) gained 1.21%, Hong Kong’s Hang Seng (HK50) added 2.69%, and Australian S&P/ASX 200 (AU200) was up 0.60% by the end of the day.

Japan’s Cabinet on Tuesday will approve a supplementary budget for the current fiscal year to spend 29.1 trillion yen ($199 billion) on an economical package designed to ease the pain for households and businesses from rising prices exacerbated by a weaker yen. The government will issue about 22.8 trillion yen in bonds to provide the necessary financing, further pushing back the fiscal recovery despite the fact that its debt is already more than twice the size of its economy. The government estimates that the energy-focused measures will help reduce the country’s core consumer inflation by 1.2%.

S&P 500 (F) (US500) 3,770.55 +50.66 (+1.36%)

Dow Jones (US30) 32,403.22 +401.97 (+1.26%)

DAX (DE40) 13,459.85 +329.66 (+2.51%)

FTSE 100 (UK100) 7,299.99 −34.85 (+2.03%)

USD Index 110.16 −0.718 (−0.64%)

Important events for today:
  • – Australia NAB Business Confidence (m/m) at 02:30 (GMT+2);
  • – New Zealand Inflation Expectations (q/q) at 04:00 (GMT+2);
  • – Switzerland SNB Chairman Jordan speaks at 10:15 (GMT+2);
  • – Australia RBA Governor Lowe Speaks at 11:30 (GMT+2);
  • – Eurozone Retail Sales (m/m) at 12:00 (GMT+2);
  • – US Congressional Elections (All Day).

By JustMarkets

 

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.


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