U.S. Midterm Results Offer Hope To Long-Suffering Emerging Market Bulls

The “cleanest” (if you will) read on the midterms in terms of the reaction across markets on Wednesday is the weaker dollar.

Theoretically, a split government should probably be ambiguous for the greenback over the longer-haul, but in the near-term, Democrats retaking the House looks likely to weigh on the dollar. The assumption is that prospects for another large fiscal stimulus push have now faded considerably and Trump will have to move less aggressively on trade. Of course “less aggressively” doesn’t mean “call off the trade war”, it just means there’s going to be even less support on Capitol Hill for Trump’s “Damn the Torpedoes” approach to protectionism than there already was.

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“Republicans should now push the Trump Administration to pursue more cautious economic policies, particularly with respect to trade,” Bloomberg quotes Ashmore’s Jan Dehn as saying this morning. “The likelihood of very large stimulus measures has now declined,” Dehn added, before concluding that “all in all, these factors will weigh on the dollar and support EM currencies.” The greenback is down markedly on the day.

SocGen’s Kit Juckes doesn’t see the trade concerns abating materially. “At the margin, the outcome of the Midterm elections in the US will be to hinder further fiscal easing, increasing the likelihood that the economic cycle is peaking, but leave the President free to continue his trade policies”, he writes on Wednesday, adding that “in all, that’s a slight negative for the dollar, though not against the most trade-sensitive currencies.”

For Juckes, the yen and the euro should benefit from the election outcome, but with trade concerns set to linger, the pressure on the yuan will probably not abate.

EM FX is looking buoyant on Wednesday. Here’s a snapshot.

(Bloomberg)

Note that the rupiah is doing especially well, rising the most since summer 2016. You’ll recall that IDR has had an extremely rough go of it in 2018 amid ongoing Fed tightening. BI’s attempts to keep pace with the Fed in the interest of shoring up the currency have been largely for nought has multiple rate hikes did little to arrest the rupiah’s slide. Now, there looks to be some reprieve.

The rand is having a nice day as well, rising to a three-month high.

Emerging market equities look to be bid as well. Turkish stocks, for instance, are up more than 1%, rising for a fifth session in six.

The bottom line is that while opinions vary (as they’re wont to do), there seems to be some consensus around the notion that the midterm outcome is positive for emerging markets.

And look, even if you don’t buy that thesis entirely, it’s important to remember that EM has already taken a severe beating this year and looks cheap on the fundamentals. The point is, if you were looking for an excuse to bottom fish in EM, the midterm outcome is just as good as any other.

(Bloomberg, annotations by EastWest)

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A Cross-Asset Guide To The U.S. Midterms