Authored by Peter Tchir via Academy Securities,
As much as I’d like to avoid discussing elections, it is unavoidable today.
Republicans taking either the House or the Senate or both is consensus and is viewed as bullish for risk as gridlock will slow spending, reducing inflation, reducing pressure on the Fed, helping rates, which will let equities rip higher. Seems believable and plausible.
Potential for many elections to not be decided by tomorrow morning as voting takes time and mail-in votes need to be tallied (or potentially waited on, if it is a close election where the day a ballot is post-marked is the metric for it is valid). Seems largely built in, but could get contentious. Probably not an overnight event, but something to watch if the issue develops and seems to be big enough to sway the outcomes in the House or Senate or both.
Big blue wave. I haven’t seen much mention of this from any official polls, and it seems unlikely based on polls and the path midterm elections typically follow, but markets will not react well.
I’d buy any dip on a small win for Democrats as I think that regardless of the election:
The President will want to switch to finding peace between Ukraine and Russia. Not only is it expensive in terms of supplying weapons, but as sanctions ramp up later this year and early next year, the West will be collectively hurting itself. There is already concerns in Europe about ratcheting up the sanctions (rightfully so, as it will probably just drive energy shipments to countries that will buy from Russia, causing it to take longer to buy more expensive shipments in the West from elsewhere). Not to mention, the war seems unwinnable – which may be why the tone in Russia is hinting at the potential of softening, and China seems “tired” of this war.
Inflation will be less of a boogeyman after the election as politicians will focus their attention on jobs! That shift makes sense and can be latched on by those in the Fed Who Don’t See Dead People. There seems to be a segment of the Fed that is increasingly interested in seeing how the lagged effects of the already done hikes and ongoing QT effect the economy. Also, FINALLY, there seem to be those who are questioning making policy based on clearly old (and therefore not useful) data! (btw, have seen some serious, model driven economists, also question the size of the birth/death jobs in the latest NFP – which gives me some hope).
I like the election rally and asides from a blue wave, would be buying dips.
FX markets seem to be holding their own even as China has downplayed the allegations that they are shifting their COVID 0 policies. Part of last Friday’s rally was fueled by several stories that China was considering changing how they combat COVID. China, for all intents and purposes, denied those reports over the weekend, but stocks held their own and the all-important Japanese Yen is holding on to its gains as I type this on Tuesday morning.
Yes, we get CPI this week, but I fully expect core, if driven by “rent” will be ignored much more than last month as so many people are coming around to our way of thinking!
Finally, yet another run on a crypto “exchange” (I use that term very loosely) is sparking a big sell-off in FTT (a “native token of the FTX Trading Platform ecosystem – a Bloomberg description). It is down over 20% (as of Tuesday morning) and seems to be dragging major cryptocurrencies down as well (Bitcoin -5% with Ethereum -6%). I’d hoped that China cracking down on their citizens and business would support bitcoin for longer, but that trade may well be over. These types of sell-offs are indicative, to me, of problems with the “plumbing” in crypto, which have a tendency to expose more flaws in the system rather than quietly resolving themselves. It is a GREAT TIME TO REMEMBER – that terms like “banks” “exchanges” “custodian” etc. all have real world meanings, but in traditional finance those are more than labels, they are given to entities to that meet certain regulated criteria. That is just not the case for much of the crypto world. We apply terms to entities rather loosely and people, all too often, attribute some of the usual meaning of those labels to those firms, without really verifying that they are applicable!
In the meantime, we get to watch all markets, but especially U.S. stocks, oscillate wildly as daily expiration options become a more and more commonly used trading vehicle.
For those watching, TQQQ has taken in over $1 billion in the past two days with a big surge in shares outstanding, which at least supports the view that some “gridlock” scenario is the consensus and might be getting priced in already.
Good luck today and get out and vote if you can!
