Dollar slides and equities gain as Democrats win both chambers

Markets are working through a substantial shift in Washington: the dollar is weaker, Treasury yields are slipping and US equities are trading higher. Democrats have taken both the House and Senate, which leaves divided government in place for the last two years of President Trump’s term. The new Congress is seated in January.

The question traders face right away is how much of that first reaction will stick. Softer yields and a weaker oil price give equity buyers a friendlier backdrop, yet the election outcome on its own does not set the next trend. Inflation, jobs data, earnings and the Fed are still the key gauges.

A harder road for legislation in Washington

With the result, Democrats gain more scope to take on the administration — through congressional investigations, talks over bills and the Senate’s handling of presidential nominees. Trump still holds his veto, so each side runs into limits on what it can achieve.

For markets, fresh tax cuts and large spending packages may now clear a higher bar. That could dampen expectations for more fiscal stimulus and goes some way to explaining the attention on lower Treasury yields. At the same time, split control of Washington can set up clashes over government funding and the debt ceiling.

Oversight of technology is a further area to watch, artificial intelligence, data centres and cryptocurrencies included. More scrutiny would not by itself become wide-ranging legislation. Traders have to tell apart a shift in the political backdrop from policy changes that genuinely make it into law.

Middle East: diplomacy carries on, though the risks persist

Headlines from the Middle East keep pulling both ways. Reports of concessions in the US-Iran negotiations were followed by Iranian pushback against the idea that a deal was near. The diplomatic picture is still unsettled.

Qatar is still mediating, though a senior Iranian official told Reuters the two sides were still far apart. US officials also reported limited strikes on Iran’s Qeshm Island, and Trump said he was in no rush to restart attacks.

In a separate report, Reuters said Iran’s Revolutionary Guard claimed four tankers had hit mines near the Strait of Hormuz and that two more vessels had been seized. The claim is attributed to Iran, but it highlights the persistent danger to shipping.

Crude oil, even so, could not hold on to its earlier gain. It got to $97.15 before turning down and now trades close to the session low at about $94.50. Buyers had their opening to push higher. They could not keep the move going, which leaves sellers holding the stronger hand as North America comes in.

The dollar is weaker against all the majors

The dollar has fallen against every one of the major currencies. The biggest drop is against the New Zealand dollar; the smallest is against the Japanese yen.

• EURUSD: 1.1261, up 0.61%.

• GBPUSD: 1.3488, up 0.57%.

• USDJPY: 158.31, down 0.22%.

• USDCHF: 0.8155, down 0.62%.

• USDCAD: 1.3946, down 0.46%.

• AUDUSD: 0.7011, up 0.65%.

• NZDUSD: 0.5632, up 0.86%.

The breadth of the move counts. The dollar’s slide runs through all the major pairs, with the yen taking part only to a smaller degree.

Ranges already top the usual daily move

Measured from session high to session low, the current ranges are wider than the 22-day averages, which points to more trending price action, even if the route to here was volatile. The dollar is trading near its lows against the euro, sterling, the Canadian dollar, the Aussie and the kiwi. The New Zealand dollar is up even after a weaker jobs report.

• EURUSD: 1.1185 to 1.1270 — 85 pips, roughly 120% of its 71-pip average.

• GBPUSD: 1.3409 to 1.3499 — 90 pips, roughly 127% of its 71-pip average.

• USDJPY: 157.41 to 158.74 — 133 pips, roughly 162% of its 82-pip average.

• USDCHF: 0.8128 to 0.8211 — 83 pips, roughly 160% of its 52-pip average.

• USDCAD: 1.3945 to 1.4014 — 69 pips, roughly 108% of its 64-pip average.

• AUDUSD: 0.6955 to 0.7022 — 67 pips, roughly 152% of its 44-pip average.

• NZDUSD: 0.5582 to 0.5645 — 63 pips, roughly 143% of its 44-pip average.

Every one of the seven pairs has already gone past its average daily range. That does not rule out more extension, but it does mean traders are arriving after a sizeable move.

The practical takeaway is to set your risk before you chase. A range that has stretched is not a signal of reversal. Buyers and sellers alike still need a technical level to work from, with risk defined and capped.

US stocks are mixed

The latest readings put the Dow and the S&P 500 higher, while the Nasdaq swings above and below unchanged in early North American trading:

• Dow industrial average: up 884 points.

• S&P 500: up 68 points.

• Nasdaq: up 30 points.

Treasury yields are lower

Yields in the US are down right across the curve, and the falls are bigger at the long end:

• 2-year: 4.6038%, down 1.02 basis points.

• 5-year: 4.7161%, down 2.69 basis points.

• 10-year: 4.9167%, down 3.33 basis points.

• 30-year: 5.2922%, down 3.18 basis points.

Falling yields can lend support to stocks and gold while pressuring the dollar. The next gauge is whether those declines survive the incoming US economic data.

European equities join the rally

Shares across Europe are higher by and large:

• Germany’s DAX: 26,252.38, up 387.75 points or 1.50%.

• France’s CAC 40: 8,149.51, up 129.19 points or 1.61%.

• UK’s FTSE 100: 10,800.70, up 162.27 points or 1.53%.

• Spain’s IBEX 35: 19,363.89, up 556.68 points or 2.96%.

• Italy’s FTSE MIB: 51,000.75, up 1,058.93 points or 2.12%.

Yields on European government debt are lower too. Germany’s 10-year sits near 3.318%, France’s near 4.884% and the UK’s near 5.216%.

Gold rallies as bitcoin comes back from its overnight low

Gold trades around $4,043, some 2.9% higher, and silver sits near $52.10, up about 4.65%. Both are gaining alongside the softer dollar and lower Treasury yields.

Bitcoin dropped to an overnight low of $75,666 and then recovered to about $78,184 in the snapshot provided, a bounce of $2,518 off that low.

The bounce shows sellers were unable to maintain the overnight pressure. Buyers now have to build on it. Staying above the overnight low keeps the recovery attempt alive, though a lasting bullish turn still needs progress through technical resistance.

What’s on the North American calendar

The day’s schedule brings jobs, trade and services-sector data:

• 8:15 AM ET – ADP employment change – Forecast: 69K vs 90K last month

• 8:30 AM ET – US trade balance – Forecast: -$108.0B – Previous: −$105.6 billion.

• 9:45 AM ET – S&P Global final services and composite PMIs. Prelim 57.6 composite and 57.9 Services

• 10:00 AM ET – ISM Services PMI – Forecast: 54.8 – Previous: 54.9.

• 10:30 AM ET – EIA weekly crude oil inventories.

The employment and prices components of the ISM report will be especially useful gauges of growth and inflation. With yields already down and currencies having covered more than a normal day’s range, a surprise could test whether the overnight moves can run further.