The key factor today is the price of Oil

Summary: The dollar index is 101.46 from 101.215.      

The 10-year yield is 4.89% from 4.921%. The German Bund 10-year yield is 3.2639% from 3.3208%.                      

The 30-year is lower at 5.267% from 5.303%.  

Equities: The S&P gained 1.58% and the Nasdaq, 1.44%. Futures point up for the S&P but not for the Nasdaq (at 7:15 am). In Asia, the indices rose except the Nikkei, Kospi and Taiwan. In Europe, everything is higher. 

Hot news

The Bank of England raised interest rates (to 4.0%) and analysts expect another hike in Feb. ING speculates “A renewed spike in energy prices could bring that forward to December. However, we're still sceptical that the Bank will need to hike more than once more.”

War

Brent oil is now quoted under $100 after hitting $116.28 only a few weeks ago (Oct 23). While the Qataris await the US response to the Iranian offer (at least we think that’s where it stands), even Trump admits the Republicans lost the midterms in large part because of the war > price of gas/diesel. Besides, the Dems are waiting to vote on ending the war. And rattling their sabers over Sec Defense Hesketh’s conduct.

We are not sure Trump will TACO. This seems like suspended animation but the gridlock is temporary—until Trump makes a move.

Euro

The euro is jitterbugging all over the place, putting in nearly full retracements every few days. See the 240-minute timeframe insert. This is due to alternating dominance of one or another of the factors, including whether the midterms really can mean the US reins in fiscal excess while the eurozone has its own fiscal issues, aka France. Meanwhile, there’s the different response to inflation at the Fed and ECB, not to mention whether the price of energy is going to slam Europe over the head this winter.

Outlook

The ADP private sector payrolls had a bigger number than expected at 85,000. See the chart from the Daily Shot. Nobody paid the slightest attention because the midterms and their implications dominate.

The key factor today is the price of oil. Traders interpreted the midterm results as blaming Trump for higher prices, which is not only true but something Trump himself admitted. This implies that for the moment, he won’t be trying to obliterate Iran any time soon. It’s a de facto ceasefire. Therefore the war premium on oil can go down, a lot.

Reuters reports “The oil price slide - which if sustained amounts to the biggest weekly drop since the pandemic plunge - pulled bond yields down across ​the world and lifted Wall Street stocks broadly on Wednesday. The S&P 500 had its best day in three months.”

A side issue—the data center buildout—is now a central one. Voters in 39 of 40 ballots voted no to ongoing buildouts and in Texas, where Musk thought he reigns, the entire state apparatus was shoved out the door, including the governor (who favored data centers) and the railroad commissioner, who manages the oil and gas industry.

This was democracy really at work. The voters were not thinking of tech/AI balance sheets and free real cash flow, but Wall Street got it and right away. The Guardian writes “In Ohio alone, at least 14 municipalities passed bans or restrictions on datacenter development, including in Sunbury, where Amazon has proposed a $2bn datacenter project. In Maine, eight municipalities passed temporary datacenter moratoriums. In Emporia, Kansas, where a 1,000-acre gigawatt-scale datacenter was recently proposed, a ban on high-impact datacenters was approved by voters.”

Only one exception to voting down data centers--Hardwood, North Dakota, population 1000.

This is actually very god news for the stock market and analysts are already predicting the boom will revive and persist into the new year, as is customary after a midterm election. Slowing down the AI process gives the well-structured companies breathing room and makes the circular funders restructure.

We are nowhere close to finishing analysis of the midterms, but the early verdict, that conditions won’t change all that much any time soon, turned out to be dead wrong. Example: the stock market liked the idea of the government regulating AI and the voters rejecting data centers. Bloomberg considered it a worry, but it turns out to be a favorable.

Another worry is that the new Congress will dial back Trump spending, meaning the Treasury will not have to issue so much new debt. Both prospects are critical to the dollar.

The more critical factor is reducing the deficit. Any realistic effort in this direction, with or without the 20 or so Tea Partiers still in office, points to a drop in yields. This can happen independently of what the Fed is going to do after the December policy meeting. We don’t know the Dem policy stance—yet. This is something to watch like a hawk. (If they are smart, the Dems will make a big deal out of this, for “the sake of the grandchildren” or some other soppy thing.)

A third worry is that Trump becomes obstructionist and we get a longer-lasting gridlock. But a bigger factor is that he is no longer the Big Bad Wolf. As Chris Christie put it, the Trump era is OVER. Republicans need not fear him any more. He’s still in charge of a lot of things and can do harm, but the price of gold rioting upward indicates the risk aversion arising from Trump is less, if not gone entirely.

Markets usually stay as far away from politics as they can, but this is more than politics, this is a ray of hope that America is back again. As far as we can tell, people in other countries feel the same way. They will be on guard until the guy is actually gone, but the healing process could be beginning.

Forecast

Because we are in a state of gridlock and don’t know how long it will last, we have to fall back on basics, starting with tigers and stripes. Trump is not going to hide under the bed licking his wounds. He is going to come out roaring with some fresh cockamamie insult to common sense. Some speculate this is more tariffs or abandoning Israel or re-escalating the Iran war.

Secondly, the idea that the midterms mean a pullback in spending is premature.

Trump can keep overspending for another two years. The Dems do not have a track record for reining in spending, although maybe they will get religion. After all, the only president to reduce the deficit was Clinton. But not his week, or next. The drop in yields is probably due more to uncertainty about oil and the war, not the deficit.  Alas, there is a very good chance yields start going back up again. The question is whether others go up in sync.

For the moment, the dollar is soft for all these factors. As we untangle the meaning of the midterms, that can change—and on a dime. Intraday vol is too high for trend-following to be as reliable as we like to think. Be careful.

Tidbit: Regulating AI may not have much effect on the big seven or the SOX. The data centers are not in the picture because controlled by the states. In any case, the relationship of SOX and the dollar index is hideously complicated (a warning flag) and somewhat of a negative correlation…

US Politics: The Republicans’ political disaster yesterday contains some critical nuggets of social significance. The voters rejected Trump’s misogyny, Islamophobia  and racism. They elected the first black woman state governor, first native American woman governor, and two first Hispanic governors. They chose the first gay man to serve in the Senate and the first Muslim.

Those law firms and universities who caved on diversity measure are crying in their beer.

Formerly deep red states went blue--S. Carolina, Texas. Kansas got a Dem for the first time in over 90 years. In down ballot state races, Dems got majorities in legislatures in Florida, Iowa, Missouri and North Carolina. Those governors will have a hard time. They got the governorships in Georgia, Iowa, Ohio and Texas. They got everything in Pennsylvania, which the Republicans thought was in play.

It’s the worst loss since Nixon. The Dems can fritter away their advantage if they go for impeachment rather than actually needed legislation or arguments about transgender child athletes. If they chose the right things under the guidance of the first black House Speaker, the 2028 presidential election may be in the bag. There is a good chance the Republicans still in office see the handwriting on the wall and decide to defy Trump.

This would mean the two-thirds Senate majority to overcome a presidential veto. That would be the tipping point for the Republican party and for Trump. The Dems plus the defecting Republicans could fire up support for budget cuts, help to Ukraine, end the war in Iran, halt cozying up to Putin, regulate AI and crypto, and investigate Trumpian corruption, not to mention take the Justice Dept and ICE to task for illegal and improper conduct. And that’s not even mentioning Epstein and halting Trump’s vanity projects.

The Trump administration is committing crimes already on the books and action needs to be taken to stop it and prevent it ever happening again. If they fail to do this one thing, all the rest of the counter-Trump measures, while still good, will not be good enough in the long run.

What will Trump do now? His usual stance is defiance of anyone who doesn’t bend the knee to him, and we can’t expect a change in personality. He still has executive orders he can release. Realistically, he cares more about his “legacy” than about the Republican party, but as a habitual bribe-taker himself, he could try to bribe Republicans from his vast campaign funds or his pals.

This is probably going to get ugly. Two culprits—the vicious Trump and the notoriously disorganized Dems. But Trump is the lamest of lame ducks now. It will be interesting to see how the tech bros and billionaires gradually slink away. Will they join the Dems now? Musk spent almost $500 million and got nothing for it  (half of it in Texas, where he has big operations). He won’t be the only one cozying up to Dems. This could be a critical shift not only politically, but could lead to addressing the vast income inequality in the country. The majority (about 60%) in polls say they believe in free-market capitalism. These guys could join the Dems to make some changes to keep it that way, if they know which side of the bread their butter is on.