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A sad day for American liberal today. US president Trumps strange behavior and policy by the seat of his pants seem to have little negative effect on support. In a highly contentious campaign, unusually high voter turnout Democrats were only able to gain the house but republicans strengthen Senate majority. The only clear takeaways right now is that the US cultural and political divisions have only deepened. The reactionary blue wave that was expected to materialize as refute to Trumps erratic leadership failed to show up. However, democrats now have a check on Trump unilateral actions. We expect when the time is right the House will launch impeach process.
Reaction on financial markets were limited but expected. Shanghai composite was down 0.68% as trade tension will continue and as Trump is free to follow his strategy. Broad USD was lower as politics in US will head toward gridlock and disorder. Interestingly, crude prices fell to 61.92 down 4% in a week despite expectations that sanctions on Iran will tighten. Trade sensitive currencies had priced in the outcome and therefore unchanged. We anticipate US stock to rally on a smooth uneventful election and expectation that Trump expansionary policy will continue.
Remember no politician will stand in front of tax cut. While Fed is still in a hiking cycle US late stage economic cycle will natural decelerate the US economy, despite Trump fiscal easing, suggesting that US yields are near peak (10s yields under 3.50%), asset that have re-correlated with US yields are likely to find pressure relief.