Wednesday, November 07, 2012

Markets Volatile After Obama Victory

Markets volatile after Obama’s victory

By Jamie Chisholm
Global Markets Commentator
Financial Times
Wednesday 13:10 GMT.

Wall Street is on course to lose ground as investors react to news that Barack Obama has been re-elected as US president, attention switches to the country’s fiscal problems, and as the euro slides on worries about the poor state of the bloc’s economy.

A retreat in S&P 500 futures is the latest in a series of sharp moves for markets on Wednesday. At 0300 GMT the futures contract was down 1 per cent as traders appeared to fret that the US election result might not be clear cut – a scenario that was considered to be the worst of all for investor confidence.

But then a creeping rally really got under way once it was revealed that Republican challenger Mitt Romney had phoned Mr Obama to concede defeat. By 0730 GMT Wall Street was in line for a 0.5 per cent gain as global traders welcomed the removal of a crucial piece of sentiment-suppressing political uncertainty.

It was likely that investors were particularly happy that Mr Obama’s win was seen as securing the tenure of Ben Bernanke, the dovish chairman of the US Federal Reserve.

Copper jumped and gold rose sharply, while the dollar and Treasury yields were lower in response to the prospect of the Fed’s supportive monetary policy continuing indefinitely. The FTSE Asia-Pacific index climbed 0.7 per cent.

However, confidence has crumbled once again, with the S&P 500 now in line for a 0.9 per cent retreat. The dollar is up 0.3 per cent, copper is down 1.3 per cent and gold has pared its gains to rise just 0.3 per cent to $1,720 an ounce.

The main clue to the cause of this current relapse perhaps can be found in the fixed income markets.

Money has continued flooding into Treasuries –forcing 10-year yields down 10 basis points to 1.65 per cent – as investors start to worry about how such a politically divided Washington can deal with the country’s mammoth budget deficit and ensure the world’s biggest economy does not fall off the so-called fiscal cliff.

Mohamed El-Erian, chief executive of bond fund Pimco, told the Financial Times: “Despite all the campaigns’ claims and their massive spending, it risks being déjà vu all over again for markets. After an initial flurry, they may well return to worrying about being hostage to the whims of a bickering and indecisive Congress”.

Fitch, the ratings agency, reminded investors what is at stake. “As reflected in the negative outlook on the [US’s AAA] rating, failure to avoid the fiscal cliff and raise the debt ceiling in a timely manner as well as securing agreement on credible deficit reduction would likely result in a rating downgrade in 20132,” it wrote in a note.

Also hurting investor confidence is another burst of angst about the eurozone. The single currency is down 0.5 per cent to $1.2756, a two-month low, as investors become increasing concerned about the region’s economy.

Data released on Wednesday showed eurozone September retail sales fell by a greater than expected 0.2 per cent. In Germany, the country’s council of economic advisers forecast the economy would grow by just 0.8 per cent this year and next, while another report revealed industrial output in September contracted 1.8 per cent against expectations for a 0.5 per cent contraction.

Adding to the tension is the waiting to see if the Greek parliament will pass bills containing structural reforms and spending cuts, designed to secure the country’s next tranche of aid. The FTSE Eurofirst 300 equity index is down 0.3 per cent.

All that said, it is interesting that Spanish 10-year bond yields, used by many traders as a proxy for eurozone anxiety, are steady at 5.63 per cent.


Stock futures plunge on Obama reelection

by Adam Shell and Matt Krantz
Nov. 07, 2012
Source: USA TODAY

NEW YORK — Investors reacted to the news of President Obama’s re-election by sending U.S. stock futures sharply lower Wednesday morning.

With the stock market set to open at 9:30 a.m. ET, trading in key stock index futures were sending signals that stocks would fall sharply when trading begins.

Futures for the Dow Jones industrial average were signaling the index would drop more than 100 points when trading begins.

In foreign markets, investors seemed not ready to overwhelmingly endorse Obama’s win. In Europe, key indexes in Britain, France and Germany opened higher but reversed course and were all trading lower Wednesday. In Asia, markets ended the day mixed.

Investors seem to be looking past the hard-fought Obama win and focusing on the virtual status quo that remains in Congress, where Republicans retain control, and the Senate, in which the Democrats still have a slim majority, altered little by picking up two seats.

That means averting the so-called “fiscal cliff” looming in December, when a host of mandated budget cuts and tax cut expirations, could be just as troublesome as investors had feared before they knew the outcome of the presidential election. The biggest fear is that Washington’s inability to compromise will amplify economic and financial woes plaguing the U.S.

The dollar was stronger against the euro, which dipped 0.4% to $1.2756, probably more a reflection of ongoing worries about the debt crisis in Europe. Greece faces its toughest vote yet Wednesday on passing $17.3 billion more in austerity measures to qualify for more bailout funding or default on millions of dollars in loans. The dollar did strengthen slightly, 0.3%, against the yen.

Gold prices had been up as much as 2% overnight but the gains were trimmed to 0.4% by early Wednesday, to $1,725.20, as global investors puzzled over how the election might affect inflation.

Late Tuesday night, experts predicted no long-lasting change in market sentiment because an Obama win likely translates into no major changes in U.S. international policy.

“An Obama victory will leave less uncertainty for the markets and probably help what’s been better sentiment in Asia recently,” said Mark Headley of Matthews Asia Pacific fund. Had Romney won, it would have meant “more uncertainty for a world already with lots of uncertainty.”

Before Tuesday’s vote, markets overseas had already been pricing in and anticipating a win by President Obama as investors hoped for the continuity, said Jim Welsh, portfolio manager of the Forward Tactical Enhanced Fund. Foreign investors appreciate the “stability that a reelection of Obama would provide,” he says.


The Fiscal Cliff Just Got Steeper

November 7, 2012
Rick Newman

President Barack Obama pauses as he speaks at the election night party at McCormick Place, Wednesday, Nov. 7, 2012, in Chicago. Obama defeated Republican challenger former Massachusetts Gov. Mitt Romney.

There's less uncertainty on the political landscape. But there's now more to worry about.

For a short while, Wall Street seemed to be fantasizing about a strong Republican showing in the 2012 elections, which would have brought single-party control to a notoriously fractious and dysfunctional government in Washington, D.C. That's one explanation for why the stock market had a banner day as voters were heading to the polls, rising by nearly 1 percent on a day when there was little tangible news to justify the gain.

But after a seemingly endless campaign and $6 billion worth of political spending, Americans voted to reelect President Obama, keep Congress more or less the way it's been, and continue the divided government that's been in place for the last two years. Many analysts considered that a worst-cast scenario in terms of resolving the "fiscal cliff," the huge set of tax hikes and spending cuts set to go into effect in 2013 if Washington doesn't come up with a better plan.

Since averting the cliff would require some kind of compromise between Democrats who control the White House and Senate, and Republicans who control the House of Representatives, a continuation of the status quo suggests that the same spiteful partisan squabbling that already dominates Washington will suffuse negotiations over cutting the deficit and starting to pay down the $16 trillion national debt.

"A status quo outcome will be viewed as a disappointment, and markets may sell off somewhat in the short run," wrote David Joy, chief market strategist for Ameriprise Financial, in a brief analysis of the election's consequences. "It will be viewed as an outcome which offers the prospect for continued partisan bickering on a budget deal, and which increases the likelihood of brinksmanship on the fiscal cliff."

Many analysts assumed that a Republican sweep, including control of both houses of Congress, would have raised the likelihood of a deal to rescind most or all of the tax increases scheduled to go into effect in 2013—which amount to about $545 billion. But Obama wants to raise taxes on the wealthy, which Republicans have said they won't tolerate.

That portends a nasty standoff similar to the meltdown that occurred when the U.S. borrowing limit needed to be raised in the summer of 2011, and bitter partisan wrangling went till the very last second. The borrowing limit did get raised, but the needless 11th-hour drama—plus the collapse of a broader deal to corral the mushrooming national debt—led to the first-ever downgrade in the U.S. credit rating. Over the next month, the stock market fell by seven percent.

So it's little wonder that Wall Street expects more of the same when an even bigger set of deadlines hits at the end of the year. "In a scenario in which the political makeup inside the beltway is largely unchanged from last summer, we expect an intense battle," investment bank UBS advised clients in a research note ahead of the election.

There are still plenty of ways that a divided Washington could steer clear of the cliff and spare the economy another unneeded shock. President Obama, who hasn't staked out a strong stance on deficit reduction, could grant House Republicans a few of their priorities—which mostly involve spending cuts—in order to reach a compromise. Chastened Republicans might show a stronger inclination to solve problems rather than scoring political points. Business leaders, who have been heavily lobbying for a solution, might finally bang some sense into the politicians.

But none of that will happen for a while, if it happens at all. In the meantime, brace for a few weeks that may be the bumpiest of the year so far. The election is over, but the fighting probably isn't.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

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