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

Is this the catalyst emerging markets needed?

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.

Election results recap

Blue Trickle: Democrats Win Back House In Uninspired Fashion, GOP Holds Senate

“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.

DXY

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.

EMFX

(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.

IDR

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

USDZAR

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.

Turkey

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.

EMSPXDiff

(Bloomberg, annotations by EastWest)

Read more

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

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1 comment on “U.S. Midterm Results Offer Hope To Long-Suffering Emerging Market Bulls

  1. The main reason of the EM beating was the strong dollar. A weak dollar therefore should help them. This summer you pointed out how a weaker dollar was one of the condition to keep US equity markets in a bull/lateral trend, or a correction was to be expected. If I remember well it was Needham that gave 95 in the dollar index as the level to monitor, that index went from 97 to 95.60 these days. Today we have US bonds yields lower, weaker dollar, and index futures up. VIX futures are down 12%, and this should prompt risk parity / algos to buy and overcome the supply from delta neutral funds that buy the dips and sell the rallies to rebalance the delta. Then there are the usual statistics on seasonals (last quarter, santa klaus rally, the 6 months from November to May, the midterm positive return of the following 12 months). It bodes well, but we will still feel the effects of the Chinese slowdown, and the yuan issue will turn up again. So while it’s possible to see levels near the ATH I’m not yet convinced that a strong bull will begin again. Bumpy and choppy is my expectation. I would be surprised to see another 2017 style melt-up.

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