A palpable sense of “What now?” pervaded US markets Wednesday, when the combination of inconclusive US midterm elections and another near-death experience for the cryptoverse, left traders bereft.
Stocks were lower on Wall Street. I’d say “sharply” lower, but like everything else in 2022, that’s a highly relative term.
2% swings are scarcely worth mentioning anymore if there’s not a backstory (figure below).
Fortunately for anyone chained to a cubicle and compelled to churn out boilerplate copy or generic analysis in exchange for a paycheck that covers (rising) rent in Manhattan plus one morning latte and two evening well drinks, there was a backstory on Wednesday, albeit not one conducive to neat summation.
Multiple congressional races remained too close to call, and Georgia’s Senate contest was once again headed for a runoff which, in a repeat of 2020, may decide which party controls the chamber. Libertarian candidate Chase Oliver garnered 2% of the vote, robbing Raphael Warnock and Herschel Walker of the opportunity to claim a clean victory.
Walker compared himself to Ricky Bobby, Will Ferrell’s beloved character from Talladega Nights. “I don’t come to lose,” he (Walker, not Bobby) told supporters. Endearing, maybe. But I’m not sure Ferrell’s Bobby is the best choice when you’re trying to convince voters of your fitness to help govern a nation of 300 million.
The generic narrative was just that markets don’t like uncertainty, and as I wrote Monday, in one of several US midterm previews, “certainty” won’t be a word anyone uses in connection with US politics for the foreseeable future. The dollar gained after an anomalous three-day swoon. The relationship is reliably negative — dollar down, stocks up and vice versa. Wednesday was a vice versa day. Rates were as muddy as everything else. 10s were only a few basis points cheaper despite a very poor auction. Obviously, traders were reluctant to add risk with CPI looming.
Market participants (and analysts, by the way) had this mapped out headed into Tuesday evening. The idea, generally speaking, was that Republicans would flip both chambers, even if the Senate was an upHill battle. That, in turn, would rule out additional fiscal stimulus and usher in a kind of austerity-by-gridlock regime, conducive to cooler price growth and lower long-end yields, as fiscal policy (or a lack thereof) complimented the Fed’s inflation-fighting efforts. In such a scenario, the only real risk was a technical US default at some point, in the event GOP brinksmanship inadvertently crashed the station wagon. (“Eh, that’s nothing to be proud of Rusty. Fiiifty yards.”)
But, you know what they say about the best laid plans. The bottom like for Republicans was simple enough. All pretensions to a “solid night” aside, if headline CPI is 8% and a sitting Democratic president is saddled with a rock-bottom approval rating, you (the GOP) should sweep every competitive race. That’s not what happened. The mixed results would’ve been disappointing enough on their own for markets. The prospect of waiting days, weeks or, perhaps, a month for the final result, was insult to injury.
“The roadmap to trading Thursday’s inflation update has been complicated by the choppy price action that has emerged in the runup to the CPI release,” BMO’s Ian Lyngen and Ben Jeffery wrote. “Details of the midterm election continue to trickle in with the full results unknown as the Georgia contest reportedly requires a runoff,” they added. “For the time being, the bullish impulse for the equity market has faded, a sentiment furthered by the drama in the crypto space to say nothing of the implications for the 2024 Presidential election — the GOP is now left to debate the merits of DeSantis versus Trump.”
Markets will pivot around Thursday’s CPI report but, as Lyngen and Jeffery noted, the situation is now complicated by political ambiguity. It’s not just that markets will be forced to wait for the final results. There’s also some consternation among traders about the absence of a sharper rebuke for Democrats vis-à-vis inflation. Voters are obviously concerned, but not enough to deliver to Republicans anything like a strong mandate.
As one former president (and soon-to-be 2024 hopeful) might put it, “Stay tuned. The ratings will be tremendous.”
