The people have spoken, but have markets? With Democrats taking the House, and Republicans holding the Senate following Tuesday's midterm elections, there is sure to be some refocusing of priorities in Washington. To get a sense of where things stand for financial and commodity markets and what to watch in the year ahead, we asked traders and regular OpenMarkets contributors Jim Iuorio, Bob Iaccino, Scott Bauer and Kathy Lien for their answers to a few key questions.
OpenMarkets: Which markets should traders watch most closely now that the midterm election results are in?
Jim Iuorio: I think we should watch interest rate markets, particularly the long end, for indications that all is well. If ten-year yields resume their move higher it will be a sign the market is comfortable with the new political landscape.
Bob Iaccino: Medium to long-term interest rates. The speedy correction in equities which seems to be over began with a move higher in long-term interest rates. That is an area of the curve controlled by inflation expectations, not by the Fed. If wages continue to move up, and prices do as well, the Fed will continue on this path of raising shirt-term rates and long end yields could rise again as well.
Scott Bauer: Obviously healthcare and infrastructure are two sectors to closely watch, but I believe the financials are most at risk now. Not risk to the downside, but risk overall depending on the Fed, the dollar and the strength of the economy moving forward.
Kathy Lien: I'm watching the bond market because when the dust settles, we are likely to see less aggressive Fed tightening next year and in turn lower long-term rates and a flatter yield curve. In the near term I'm watching the dollar because the positive response in stocks to the midterm elections will encourage December rate hike expectations.
OM: What storylines or policy moves might this set in motion for 2019 that could most affect investors and traders?
Iuorio: The most important policy issue as it relates to markets is whether or not we will continue on the supply side economic path that we have started. The win for the GOP in the Senate goes a long way in reassuring the markets that the progress we've made can be sustained and potentially built upon.
Iaccino: Infrastructure bill: Bipartisan support and could be bullish for commodities. Possibly equities as well depending on where they get the money to pay for it. If it's from tax increases on corporations, stocks move lower.
Trade resolution with China: Again, bipartisan support against China's abuses, especially intellectual property rights. Trump will likely dig in now, and Congress may lobby for a tactic other than tariffs, but Trump has the last word. Likely bearish for global multinationals medium-term.
Bauer: How will split Congress affect the ongoing tariff war.
Lien: In the coming year, Chinese tariffs, slower U.S. growth and the Fed's tightening cycle are all big stories to be watching. We are looking for a shift in the Administration's tone as they gear up for 2020 elections that could be friendlier to global growth.
OM: Could the results set in motion more bipartisanship, and how does a more cooperative Congress influence markets?
Iuorio: It's commonly said that the markets like gridlock. I'm not positive that this current situation, however, is better for markets than a GOP sweep would have been. Equity markets want less regulation and a lower tax burden specifically for corporations. A gridlocked Congress is probably fine but a greater commitment to supply side policies probably would have been better.
Iaccino: Potentially, yes but on an 20 percent-80 percent basis. 20 percent bipartisan-80 percent party line. If Democrats want to appear to be more effective for a 2020 Presidential challenge, they will work on areas of bipartisan agreement and then take credit for getting things done. Neutral to bullish, depending on funding.
Bauer: Bi-partisanship actually helps the overall market because a split Congress typically leads to stagnation of policy. The market doesn't like uncertainty and the longer that Congress drags its feet on potential policies the better the market usually reacts.
Lien: We're going to see a more collaborative attitude by the President and the Democrats as they recognize each other's powers to promote or stifle policy progress. Life will go on, the Fed will continue to raise interest rates and the Democrats probably won't stand in the way of the President's middle class tax cuts.
(This article is sponsored and produced by CME Group, which is solely responsible for its content.)