An overview …

Overall expectations and risk scenarios

The fact that the Democrats won the presidential election in the US does not change our expectations. For the short term (3 – 6 months) we still have a negative view of USD, JPY and GBP against EUR, but for the long term (12+) we have a negative view of EUR against practically all other currencies (we foresee a strong risk that the debt crisis will flare up within the next 12 months). In respect of our 3 to 6-month expectations, we had expected a stronger short-term effect (weakening of USD) from the Fed’s announcement of QE3 as well as the ECB’s OMT purchases (the ECB’s letter of intent to assist distressed European countries through open market operations). To some extent, the reason why USD did not weaken can be attributed to the uncertainty prior to the US presidential election - yet this does not, by far, explain this. Another particularly concerning factor is that the European economic indicators continue to signal weakness without any indications of the stabilisation that we had expected. If we view the development of the economic indicators in the light of the ECB's crisis measures, it is particularly concerning that investors, enterprises and consumers continue to voice fairly negative views, and we have to acknowledge that we have become much less confident in respect of our short-term expectation of an appreciation of EUR against USD, JPY and GBP. Some of the sentiment indicators that we consider of great importance in respect of a strong decline of risky assets (10-15% decline in equity prices) are the following levels for equities, commodities and currencies: Equities: The level of 1390 for the Standard & Poor’s 500 index (trading below this level for a couple of days would be a negative signal), Commodities: A breach with a daily close below 7400 for the copper price. FX: 127.50 and 132.00 for EURUSD. As long as we are above these levels, we feel comfortable about our targets. If we breach above these levels, there is, on the other hand, a strong probability that particularly our 3-month targets are too aggressive in respect of expectations of a weakening of EUR. An upward breach above 132 for EURUSD would, on the other hand, make us far more convinced that USD will continue to weaken until the beginning of 2013.

Democratic victory in the US

  • Obama was re-elected.
  • It seems the Democrats will keep their majority in the Senate.
  • The House of Representatives will still be in the hands of the Republicans.
  • The signal from the voters indicates Democratic victory.
  • This indicates that the Democrats will emerge as the overall victors after the election and hence they will to some extent be able to decide on how to resolve the fiscal cliff situation.
  • The question is, however, how much resistance the Republicans will offer. This may depend on how much strength they have in the House of Representatives.
  • The most important signals over the coming days will come from Obama and the Speaker of the House of Representatives, the Republican John Boehner.
  • The offhand reaction in the financial markets to Obama’s victory was that of relief. Not so much because Obama won, but rather because now some uncertainty has been eliminated.


Election result = status quo

Right now (7 November) it seems that the Democrats emerge as the victors of the election. Obama has been elected for a second term and the Democrats seems to keep their majority in the Senate (53 seats for the Democrats and 47 for the Republicans).

It is expected that the Republicans will still keep the majority in the House of Representatives. As doubts were strongest in respect of the of the presidency and the Senate, it must be concluded that the Democrats emerge as the winners. In the short term the biggest challenge for Obama will be to avoid the fiscal cliff, i.e. the massive fiscal tightening. It is to take effect as from the turn of the year and consists of large tax rises and cuts in public spending. The most important thing for the new president will, in cooperation with Congress, to delay the majority of the austerity measures. If he is not successful in doing that, the US will slide into recession.