Pound hits two-week high after Brexit 'thumbs-up' - as it happened

Graeme Wearden

from on 2018-11-06 15:05 (#42BB0)

Sterling rises on 'thumbs-up' hopes, as markets also wait for US midterm results

6.43pm GMT

European stock markets have closed lower tonight, as investors await news from the US elections.

Surprisingly London traders have been more cautious than their US peers who are awaiting the results of the midterm elections due later tonight. The vote will decide on whether the two US legislative houses remain Republican, like the President, or turn Democrat. The first results for the key swing states are expected around 10pm Eastern time and will colour the trading day Wednesday.

For all of President Trump's threats to his foreign trading partners his domestic economic decisions have injected the US stock markets with some vigour, particularly the massive tax cutting programme. A change in the texture of Congress would hamper his capacity to push through decisions that require legislative approval, causing concerns for businesses. However, some dark clouds are already gathering on the economic horizon, as seen by the massive selloff in stocks and bonds in October.

3.03pm GMT

You can keep up to date with all the US midterm election action in our liveblog:

2.58pm GMT

Over in New York, the US stock market has opened cautiously as midterm voting gets underway.

The Dow Jones industrial average has gained 50 points, or 0.2%,.

2.12pm GMT

Despite Brexit secretary Raab's cheeriness, the British cabinet still haven't actually agreed the terms of the Irish backstop.

Theresa May's spokesman told lobby reporters that an agreement won't be reached "at any cost". The key issue is how long the backstop would last (Brexiteers say it can't be indefinite), and who could end it (Brexiteers want the power to end it).

[The PM] said that while 95% of the withdrawal agreement had been concluded, on the Northern Ireland backstop there are a number of issues that we still need to work through and these are the most difficult.

This includes ensuring that, if the backstop is ever needed, it is not permanent and there's a mechanism to ensure that the UK could not be held in the arrangement indefinitely.

Main conclusion of Cabinet today: UK Govt now working up a backstop review mechanism to propose to the EU, to ensure it isn't indefinite.

But; it appears this will take some time. No10: "Don't be under the illusion that there isn't a lot of work to do". Tick tock...

Other sources say that Cabinet was told by the Attorney General that the EU's shift in the last few days to consider an arbitration mechanism is "a major step". And that went down quite well with the Pizza Club.

1.42pm GMT

The pound has also nudged a five-month high against the euro, trading as high as a1.1465.

1.33pm GMT

Bloomberg is impressed by the power of Dominic Raab's thumb to move markets:

The responsiveness of the pound to headlines may be well documented, but its sensitivity reached new highs Tuesday as it rallied on a mere hand gesture.

Investors had been waiting for news on progress in the Brexit divorce talks with U.K. Prime Minister Theresa May gathering her Cabinet Tuesday morning. When BBC political editor Laura Kuenssberg tweeted that the Brexit Secretary Dominic Raab had said "thumbs up" on the way out of the meeting, it was enough to send the U.K. currency to the day's high.

The British pound rallies Tuesday on a mere hand gesture: a thumbs up https://t.co/z795saqvab pic.twitter.com/Sr9ZKLmtaV

1.21pm GMT

The pound has jumped to a two-week high as Brexit speculation swirls.

'Thumbs up' - says Raab on his way out of cabinet

Pound leaps after journalist tweets about minister doing thumbs up. World. Mad. Gone. Has. https://t.co/52adfdmpex

1.10pm GMT

Rachel Winter, senior investment manager at stockbrokers Killik & Co,isn't convinced that a Democratic-controlled House would force peace in the trade wars.

She writes:

"The President uses the stock market as a barometer of his own success and is clearly keen to keep it at a high level. His plans for further expansionary fiscal policy, for example additional tax cuts and more infrastructure spending, would also have positive consequences for the stock market."

"There is concern that a Democrat majority in the House would cause governmental gridlock, making it difficult to pass further legislative changes. Further tariffs on China might be difficult to implement, which would potentially be good for emerging markets. That said, Democrats have long been critical of the trade imbalance between the US and China, and many leading Democrats applauded Trump's tariffs."

12.52pm GMT

The New York stock exchange is expected to drop when trading begins in under two hours, as America heads to the polling booths.

The futures market is calling the Dow Jones industrial average down around 50 points, or 0.2%. Yesterday it gained 190 points, so that's not a major reversal.

Election night could end with the Republicans retaining their majority in the House of Representatives and strengthening their majority in the Senate, despite a historic exodus of Republicans retiring from Congress, widespread disapproval of Trump and the customary strength of the opposition party at this stage in the elections cycle.

Yet some prominent Democrats - starting with the House minority leader, Nancy Pelosi - are predicting a blue "wave" that will deliver a strong Democratic majority to the House. (Predictions of the Senate flipping blue are notably fewer.)

12.10pm GMT

It's worth remembering that Wall Street's interests don't always run parallel to Main Street's.

Indeed, the two thoroughfares can diverge widely when it comes to the state of America, and the global economy. What's good for The Market isn't always good for The People.

Wall Street has its own interest.

Financial institutions fear that a full control by the Democrats over both houses (the House of Representatives and the Senate) could lead to the restoration of the Dodd-Frank Act, which restricts the activities of banks and the abolition of recent tax cuts.

11.46am GMT

European stock markets are falling deeper into the red as lunchtime approaches.

Britain's FTSE 100 is now down 43 points, or 0.6%, at 7060. Germany's DAX and the French CAC are both off around 0.2%.

A tentative start turned resolutely negative as Tuesday went on, investors' midterm election nerves perhaps becoming more pronounced as voting gets underway.

Looks like we're heading for no deal. Such an outcome will have serious consequences for economy of Irish Republic. In addition, UK won't have to pay a penny more to EU, which means big increase for Dublin. Can't understand why Irish Government seems so intent on this course. https://t.co/1L4WF1n85N

11.17am GMT

Many Americans have already made their choice of senator, congressman or woman, or governor, of course.

Early voting has been particularly brisk, suggesting the overall turnout at these midterms could be sizzling high as both sides push hard to get the vote out.

11.13am GMT

The polls are open, meaning early-rising Americans on the east coast can cast their ballots.

#BREAKING Polls open in eastern US states for crucial midterm elections pic.twitter.com/zS2TxifnN2

10.56am GMT

Donald Trump's trade disputes are being blamed for a slowdown across eurozone companies last month.

Data firm Markit has reported that private sector growth in the euro area slowed to a two-year low in October. Manufacturing and service sector companies both reported weaker growth, with some blaming "global protectionist measures" such as Trump's tariffs on EU steel.

Very disappointing start of 4Q for #Eurozone business activity, weakened to lowest in over 2 years @IHSMarkitPMI data show. Eurozone Composite Output Index: 53.1 (September: 54.1) Eurozone Services Business Activity Index: 53.7 (September Final: 54.7) @graemewearden pic.twitter.com/IRdbD2fHIP

10.08am GMT

Investors are also speculating whether the midterms could intensify the legal pressure on the White House.

For the last 18 months, special counsel Robert Mueller has been investigating whether there was collusion between Donald Trump's presidential campaign and the Russian government to affect the 2016 election, and whether obstruction of justice has taken place

Robert Mueller continues to zero in on Roger Stone as speculation builds that the special counsel could take a major overt step in his Russia investigation following the midterm elections next week.

Stone, a longtime adviser to President Trump who briefly worked on his campaign, is viewed as central to the question of what, if anything, members of the Trump campaign knew in advance about Democratic emails hacked by Russian operatives and then released by WikiLeaks.

The markets are understandably fidgety given the next 48 hours of headline risk....

However, flying under the radar is that these midterm elections carry a sizable legal risk for the GOP which could dent investor confidence as we will likely hear much more from Robert Mueller sooner rather than later.

9.43am GMT

Asia-Pacific stock market have closed higher tonight, apart from China which lost ground.

APAC Closing Prices:#ASX 5875.2 +0.98%#NIKKEI 22147.75 +1.14%#HSI 26120.96 +0.72%#HSHARES 10632.64 +0.83%#CSI300 3243.15 -0.60%

Asian markets mostly rose Tuesday as focus turned to the US midterm elections, which could impact Donald Trump's presidency, while Apple suppliers suffered on reports the tech titan had cancelled plans to ramp up output of its new iPhone.

9.26am GMT

All eyes are on the US mid-term elections today, says currency expert Kit Juckes at French bank Socii(C)ti(C) Gi(C)ni(C)rale.

He writes:

Opinion polls point to policy gridlock with a GOP Senate and DEM House, limiting the scope for further fiscal stimulus as the support from current measures fades.

That's the corner-stone of what feels like a consensual view that growth will slow, and rate speak (near 3%) in late 2019, supporting the dollar now, but pointing to a turn in its trend in the second half of 2019.

9.15am GMT

As Donald Trump never tires of pointing out, the US stock market has surged by around 40% since his shock election win two years ago.

That's largely due to the tax cuts which the president pushed through last year, which boosted company profits. That's catnip to Wall Street (other Trump policies, such as his anti-immigration rhetoric, don't move the markets)

Dollar bulls are looking for a Republican win, which will supportive of more of Trump's expansionary fiscal policies being pushed through. A Democrat win, and the resultant political deadlock is considered more bearish for the US dollar and US equities although we expect this to be a short-term reaction.

The unexpected result of a blue wave with Democrats taking both the Senate and the House would likely shock the markets resulting in an aggressive selloff in the greenback and US equities.

@Nate_McMurray When the #GOP brags about how great the economy is since they took control under Trump, please take another look. Who couldn't stimulate the stock market with a $1.9 trillion deficit?? Check out Obama's Dow Jones record after inheriting the great recession. pic.twitter.com/xJoCuh4EPr

9.05am GMT

Subdued trading this morning has seen London's main stock index, the FTSE 100, dip into the red

It's accompanied by most other European markets, as traders ponder whether today's US elections will embolden or restrict president Trump.

8.50am GMT

Here's our guide to the midterms:

8.48am GMT

The midterm elections have been a bruising experience for many presidents over the years.

The combination of a Republican President and a split Congress have produced an average return of 15.7% on the S&P 500 in the 12 months following every mid-term election since 1950. These strong returns suggest that investors prefer a gridlock, a situation when different political parties control the two legislative houses. While such anomalies are difficult to explain, investors may find that a gridlock produces more predictable political outcomes to model and value equities against. In the case of a gridlock, Democrats cannot roll back recent tax cuts, neither they can tighten the Dodd-Frank banking rules. It may just mean that Trump will face more difficulties in passing new laws.

However, in the current tense environment it seems Wall Street will prefer Republicans to retain both legislative houses. That's simply because a new tax cut will be expected to take place, further deregulation, and probably additional fiscal stimulus. While such measures are not necessarily good for the longer run as deficit and debt may get out of control, many investors will take advantage of these policies in the shorter run. Given that the polling industry got it wrong in 2016 and Trump became President, history may repeat itself this time again.

8.24am GMT

The Chinese stock market lost ground today, as traders worried that the midterms won't blunt Trump's trade war instincts.

The CSI 300 closed 0.6% lower today, back towards the four-year lows hit last month.

Asian shares inched up on Tuesday, supported by Wall Street gains although momentum was tempered ahead of the U.S. midterm elections... https://t.co/eH0g3bR5Zu #Nikkei #Shanghai #CSI $AAPL #stocks #shares #asia pic.twitter.com/7PiyHdLz0W

8.02am GMT

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

US midterms are expected to result in a divided Congress as Democrats are likely to flip the House but are unlikely to take the Senate. pic.twitter.com/mLFl59HG3x

So far, Republican control of the legislative powers - the House of Representatives and the Senate - has made possible President Donald Trump's large fiscal package and his deregulation agenda, as well as protected him from various ongoing investigations. An election outcome favourable to the Republicans, maintaining both the House and Senate, could set the global economy and markets on a very different path at a time when both Europe and China are showing signs of weakness. In such a scenario, President Trump would have broader policy options, including on the fiscal front and the ability to carry on with his deregulation agenda. The market could perceive this scenario as the most pro-growth, as it would raise the chances of larger tax cuts and additional spending.

In contrast, in a scenario of favourable election results to the Democrats, giving them control of the House and Senate, President Trump would have very limited policy options for the rest of the legislature. As further fiscal easing may not be possible, President Trump might focus policy efforts on the trade war against China or implement trade threats against the EU. Europe would therefore be negatively affected by such shocks, given the large impact of car tariffs on Germany and Europe.

Good econ news for a change: German factory orders unexpectedly rise as domestic demand gains. Orders rise 0.3% vs. estimate for 0.5% decline. Domestic demand climbs 2.8%, investment and consumer goods up. (via BBG) pic.twitter.com/RvkBVIlRW1

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