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While you were sleeping: Republicans at the door

Wednesday 3rd November 2010

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Stocks on Wall Street and in Europe advanced on expectations the Republicans will win control of the House of Representatives today and that central policy makers will announce plans tomorrow to bolster growth in the world's largest economy.

Investors bought stocks that were expected to benefit from a rebalancing of power in the  Congress including health insurers, an industry in which stocks had suffered by the Democrats' push to reform healthcare.

In mid afternoon trading, the Dow Jones industrial average gained 0.79%, the Standard & Poor's 500 Index climbed 0.92% and the Nasdaq Composite Index rose 1.12%.

In Europe, the Stoxx 600 gained 0.4% to 267.5 at the 4.30pm close in London.

"I don't know to what extent a change in the makeup in Congress can actually achieve anything like that, but the [Republicans'] pledge is they are going to pare back or dial back the new healthcare legislation," Robbert Van Batenburg, head of equity research at Louis Capital in New York, told Reuters.

There’s a belief that a Republican win will force President Obama to rethink his legislative agenda and adopt a more moderate position on his key objectives. In terms of health care, the consensus is that he’ll have to accept fewer restrictions on providers, which should ease concerns about their profitability.

Investors will barely have time to assess the election results before the Federal Reserve’s announcement about its plans to bolster the economy at the end of its two-day policy meeting tomorrow.

Investors expect the US central bank to come up with a second round of quantitative easing totalling US$500 billion of government debt purchases over several months.

"People are convinced that quantitative easing will be substantial. [They are] buying the rumour," VTB Capital analyst Andrey Kryuchenkov told Reuters. "The Fed does not want to disappoint the market."

Not everyone is looking forward to more bond buying though. Bill Gross, the co-chief investment officer at PIMCO, says he sees the potential for a sharp 20% drop in the value of the greenback.

“Quantitative easing not only produces more dollars but it also lowers the yield that investors earn on them and makes foreigners, which is the key link to the currencies, it makes foreigners less willing to hold dollars in current form or at current prices,” Gross told Reuters.
 
Treasuries rose in anticipation of the Fed’s announcement. Ten-year note yields fell three basis points to 2.6% at 1.11pm in New York, according to BGCantor Market Data.

Thirty-year bond yields fell six basis points to 3.94%.

The Dollar Index, which measures its value against a basket of currencies, fell 0.76% to 76.71.

The euro traded as high as US$1.4052 on EBS.

"It's not just a question of the size of asset purchases, but also the commitment they (the Fed) have to purchases. If the level of commitment is more conditional than what the market expected, that would disappoint markets," Aroop Chatterjee, currency strategist at Barclays Capital in New York, told Reuters.

Oil climbed after more OPEC members signalled a tolerance for higher prices.

Shokri Ghanem, chairman of Libya's National Oil Corp, told Reuters producers' income for dollar-denominated oil had declined while the cost of food and other commodities had risen due to the slump in the greenback.

Qatar's oil minister said US$70-US$90 per barrel would be reasonable for consumers and producers.

US crude for December delivery rose US$1.20 to US$84.15 at 1720 GMT.

ICE December Brent crude gained US$1.08 to US$85.70.

Gold also rose, supported by physical bullion demand from leading consumers India and Turkey, analysts said.

Spot gold was at US$1,350.69 an ounce at 1638 GMT.

US gold futures for December delivery edged 60 cents higher to US$1,351.20.

 

Businesswire.co.nz



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