The markets respond to Obama win

World markets slide on weak growth outlook

World reacts to Obama's re-election

CNN,

7 November, 2012

World markets lost momentum and turned lower Wednesday, following the re-election of U.S. President Barack Obama and pessimistic comments from European Central Bank president Mario Draghi.

"Unemployment is deplorably high," the central bank president said. "Overall economic activity is weak and it is expected to remain weak in the near term. And the growth of money and credit are subdued."

The European Commission also issued a report that forecast economic activity in the European Union to contract by 0.3% this year, "followed by subdued growth in 2013." Activity in the 17-nation eurozone will contract by 0.4% this year, with projected growth of 0.1% next year.

After an initial decline in Asian markets, the Hang Seng in Hong Kong ended up 0.3%, while the Nikkei in Tokyo and the Shanghai Composite dropped by a fraction of a percent.

In Europe, the DAX in Germany and the CAC 40 in France each fell about 0.7%, while Britain's FTSE lost 0.3%. Meanwhile, U.S. stock futures plunged in premarket trading Wednesday morning.

Fear & Greed Index

Analysts said Obama's win was likely to ensure continuity in monetary policy in the near term, after his challenger Mitt Romney expressed unease over the Federal Reserve's quantitative easing.

"Reduced concerns over near-term risks to the Fed's QE policy may raise expectations of lower U.S. rates for longer, and support [Asian currencies] against the U.S. dollar," Nomura strategists said in a note.

In currency markets, the U.S. dollar rose against the euro and British pound, but lost ground against the Japanese yen.

Some results were still too close to call, but CNN projections pointed to the status quo being largely maintained in much of American government. President Obama captured a second term in the White House, Republicans retained control of the House of Representatives and Democrats held their majority in the Senate.

Wall Street was thought to favor Mitt Romney, the Republican challenger with close ties to the private equity and business communities, and gains may be tempered as investors turn their attention to the so-called fiscal cliff.

Inaction would bring a sharp rise in taxes and deep cuts in federal spending set to take effect in January. Economists, including several members of the Federal Reserve, agree the economy is likely to fall into a new recession if this happens.

Some analysts, including those at UBS, predict the issues will be difficult to solve -- especially before the next class of lawmakers take power next year in Washington.

"In a scenario in which the political makeup inside the beltway is largely unchanged from last summer, we expect an intense battle," they said. "We would not be surprised if the most difficult long-term fiscal policy decisions are kicked down the road once again."

Failure to make progress on fiscal issues could have economic consequences, including possible credit rating downgrades.

"The longer-term fiscal issues of the US are still not likely to be dealt with in the near term," said BNP Paribas in a note.

"The good news is less near-term fiscal tightening and rancorous negotiation, allowing the recovery to continue to broaden and strengthen. The bad news is a steadily rising debt-to-GDP ratio.

Some Traders Caught Flat-Footed

Wednesday turned out to be a bad day for investors betting on a Mitt Romney win.

WSJ,

7 November, 2012

With Mr. Romney and President Barack Obama virtually neck and neck going into Tuesday's election, traders said that many investors had bets aimed at capturing any rise in stocks should Mr. Romney pull out a win. Their wager: Many largely expected Mr. Obama to be victorious, therefore any selloff would be minimal, with the reward seen as bigger than the risk.

But things didn't go as planned. Even before U.S. trading started, unexpected bad economic news out of Europe sent financial markets into "risk-off" mode. The euro, and subsequently prices of stocks and other investments such as commodities perceived as riskier, fell following the announcement that the European Union had cut euro-zone growth forecasts.

When U.S. trading got under way, traders found themselves in a mad dash to sell at the opening bell. The result was a postelection drop in U.S. stock prices. And those who had bet on gains were caught flat-footed.

The Dow Jones Industrial Average dropped 312.95 points, or 2.4%, to 12932.73. That handed the blue-chip average its biggest one-day fall since Nov. 9, 2011, and sent the Dow to its lowest level since August.

Wednesday's decline marked the fifth-largest selloff after Election Day. The largest was four years ago, when, in the midst of the financial crisis, the Dow fell 5.1% following President Obama's election to a first term.

Jerry Harris, chief investment officer at Sterne Agee in Birmingham, Ala., which manages $17 billion in assets, was among those who had placed bets on Mr. Romney winning the election. Mr. Harris had put money into some health-care stocks on Monday and Tuesday, predicting they would get a bump. While some health-care stocks rose, others sold off.

Mr. Harris now regrets his move, though he said the damage to his portfolio was minimal. "It wasn't a big risk, but I did the two [trades] with the deliberate intention of thinking we'd get a boost out of stocks if Romney won," he said.

On Wednesday, Mr. Harris said he told himself: "You've been caught leaning. You know better than to have strong opinions before an event like that."

The selloff surprised Thomas Lee, stock-market strategist at J.P. Morgan, who before Tuesday had called for a postelection rally through year-end no matter which candidate won. "There were probably more people than we realized hoping for a Romney win," he said.

Among the more vocal predictions on Wall Street that Mr. Romney would win came from veteran investment newsletter writer Dennis Gartman. On Monday, Mr. Gartman wrote that Mr. Romney would win, "perhaps quite handily." On Wednesday, the first words of his newsletter were, "We were wrong."

"I've been very good at this for 30 years and I missed this one," said Mr. Gartman, who said he didn't have any investments explicitly tied to the election outcome. "It's a shame that I missed this one, but it's probably not going to be my last mistake."

Especially hard hit Wednesday were financial and energy stocks, which experienced a double whammy. A win by Mr. Romney likely would have provided an easier regulatory climate for both. In addition, both are sectors that often see aggressive selling on "risk-off" days.

Exxon Mobil XOM -3.14% fell 3.1% and Chevron CVX -2.58% lost 2.6%. A number of coal stocks, seen as big winners under a Romney presidency, saw declines of 10% or more. Among financial stocks, Bank of America BAC -7.14% tumbled 7.1% and J.P. Morgan Chase JPM -5.60% gave up 5.6%.

Kent Engelke, chief economic strategist at brokerage firm Capitol Securities in Richmond, Va., on Monday reiterated what even he described as a "brazen" call that Mr. Romney would win by seven percentage points. That followed a late summer call that no matter who won the presidency, the "fiscal cliff"—tax increases and spending cuts that take effect on Jan. 1—would send stocks lower.

On Tuesday, before the polls closed, Mr. Engelke, wrote a short client update anticipating a triumph by Mr. Romney. Instead, he got up Wednesday morning and penned an acknowledgment that he was wrong. "I've never been this wrong before," he said Wednesday afternoon.The response from clients was supportive, he said. Then, on his way back from a meeting, he stopped to help some folks whose car had run out of gas. It turned out all three had worked for the Obama campaign. "All three shook my hand," he said. "Maybe this is an example of bipartisanship we need."

90 seconds at 9 am: Fiscal cliff looms (news with Bernard Hickey)