Post-midterms focus to return to China

Regardless of today’s US election outcome, the focus in global markets will likely quickly shift to the US-China trade relationship as Chinese officials are headed to Washington at the end of this week. Is something brewing ahead of the G20 meeting at the end of the month?

A prominent Chinese figure – Vice-President Wang Qishan – was out overnight suggesting that China is “ready to have discussions with the US on issues of mutual concern and work for a solution on trade acceptable to both sides”. As well, flying under the radar and all of the midterms-related noise, real developments are unfolding ahead of the G20 meeting at the end of this month that could point to the attempt at striking some sort of agreement. A number of senior Chinese officials will be visiting Washington for a second round of US-China Diplomatic and Security Dialog talks. The peripatetic Trump is in full-tilt campaigning mode and hasn’t sent any direct signals via his twitter account, but look for the US-China relationship focus to pick up quickly after the midterm elections overnight. 

US midterm election

It is clear that participation will be at a modern record for this US midterm election, but even expert sources seem mostly unwilling to veer from the consensus or predict a surprise outcome relative to polls and uncertainty on what the high turnout will mean is rife. Many have cited the difficulty of polling younger voters. One specialist polling outfit in Texas, for example, who has focused on accessing younger potential voters, shows the race for Senate between the incumbent Republican Ted Cruz and the progressive Beto O’Rourke in a dead heat while nearly every other poll shows Cruz consistently leading, even if with a rather narrow margin.

Many cite that Texas race as one of the most likely to show whether a Democratic “blue wave” is set to wash over the nation and surprise the consensus. That consensus is that the Dems will take the House with a resulting narrow majority (and that the Senate will stay more or less as is. While there is widespread evidence of a strong turnout of young voters relative to past election cycles, they still make up only a smaller fraction of the early voting turnout, which tends to be older and more Republican anyway. The key then will be first time voters on Election Day today, who will likely lean heavily Democratic. 

We will follow up with a bit more coverage later today of key races and the times that polls close, but as with the 2016 election, it could prove a long night before a final picture begins to crystallise, particularly with a number of competitive house races out on the US west coast where the polls don’t close until 4:0 GMT and where votes are apparently tallied at a rather slow pace.

The two surprise scenarios would be the Republicans retaining both houses and the opposite, a far more profound, 50+ point swing in House and even more important, the Democrats taking the Senate (they need a net two seats to move their way there and most of the Senate elections feature Democratic incumbents this time around).

Chart: USDJPY

USDJPY holding up well and has pushed to new highs for the cycle. If the US midterm outcome is more or less in line with consensus, the focus should quickly shift to the G20 and whether the US and China are set to come to some form of near-term understanding, even if avoiding a longer term rivalry/or some level of cold war with an economic battlefield seems unavoidable. Regardless, after the midterm elections, USDJPY traders should have one eye on risk appetite and the other on the US long treasury yields. Both going up is the most potential cocktail for upside pressure into the big 114.50+ area, while a big risk off move (for example on a strong Democratic result) and move back lower in yields would likely cap the action and take the pair back lower.