Great divide is good tidings for markets

Business | Ivan Tong 8 Nov 2018

With just a handful of results to come in, it is expected that Democratic Party will regain control of the House of Representatives, whilst the Republican Party will only retain its majority in Senate, leading to a split Congress once more.

This is perhaps the best result for the Hong Kong stock market as President Donald Trump might soften his stance in the ongoing trade war with China, as his administration's trade policies are likely to be challenged in a split Congress.

Hong Kong's stock market was down in early hours of trading, when the results from the polls started to flow in.

In the beginning, Hong Kong stocks and A-shares weakened when reports came in saying that the Republicans had held onto the Senate.

However, when reports indicated that the Democrats were leading in the race to the House, the stock market reversed its losses and turned higher at midday. Thus, the defeat of the Republicans in the House will have a positive impact on Hong Kong and Chinese equity markets.

Nonetheless, stock markets will remain volatile in the short term. Currently, the trend of the strong US dollar deserves careful monitoring, as there may be a possibility of a downward adjustment that will lead to a stronger yuan accordingly.

Most importantly, analysts have said a split Congress may generally benefit the US equity markets but this is hard to predict, amid a rate hike cycle.

Moreover, central banks across the world are projecting more austere policies, which might have a negative impact on US stocks.

Last week, Hong Kong's stock market was stimulated after President Xi Jinping received a phone call from Trump, which created an impression that Xi was in favor of an open market, and that the call could benefit trade negotiations in the near future.

Apart from US equities, A shares are also hard to predict.

For instance, the Shanghai Composite Index reversed gains to losses yesterday afternoon, but that could also be due to weak fundamentals in the Chinese economy.

Nevertheless, even if the stock market gets a chance to rebound in November, it won't rally for straight gains and some volatility will be inevitable.

Ivan Tong is Editor in Chief of The Standard.

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