Global shares were within a whisker of another record high on Wednesday as markets traded on expectations of a third U.S. interest rate hike this year, and waited to hear from the Federal Reserve how many more are likely in 2018.
Solid gains in Asia overnight had inched MSCI’s 47-country world index up for a fifth day running, and while the pre-Fed anticipation meant Europe’s main bourses barely budged, there was action elsewhere.
A technical glitch on futures markets made for a stuttering start to European government bond trading, while the dollar was down against the yen, pound and euro after President Donald Trump saw his already wafer-thin U.S. Senate majority cut further.
It fell as far as 113.12 yen as Democrat Doug Jones won a bitter fight for a Senate seat in deeply conservative Alabama.
The stunning upset makes Jones the first Democratic senator from Alabama in a quarter of a century and will trim the Republicans’ majority to just 51-49, meaning it could be harder for Trump to advance his policy agenda.
“The big issue now is whether Republicans will push through their tax bill before [the end of the year],” said Sue Trinh, head of Asia foreign-exchange strategy at RBC Capital Markets in Hong Kong.
“And more broadly, U.S. dollar bulls will be more worried that this marks a Democratic revival into 2018 mid-term Congressional elections.”
S&P e-mini futures were down as much as 0.3 percent after the election outcome, though they clawed their way back to flat in European trading to be broadly in line with the region’s STOXX 600 index.
The Alabama vote temporarily seized the spotlight away from the Fed, which is widely expected to raise rates later to between 1.25 and 1.50 percent, which will be its third hike of the year and the fifth since the financial crisis.
OppenheimerFunds strategist Brian Levitt suspects the Fed will also revise up its growth forecast, adding upside risk to the “dot plot” forecasts on interest rates, though he does not expect as many hikes next year as some economists.
“We are going to see a Fed that continues to attempt to tighten policy next year,” he said.
“But fortunately with inflation low in the U.S. the Fed has the cover to go slowly… I know people have hopes for the tax cuts [planned by Trump], but I don’t think they will be able to push ahead with three to four rate hikes.”
The dollar index, which tracks the greenback against a basket of six major rival currencies, was down 0.15 percent at 93.990, pulling away from a high of 94.219 touched on Tuesday, which was its highest since Nov. 14.
Against the euro it dipped to $1.1749, while the 10-year Treasury yield stood at 2.408 percent after falling to a session low of 2.389 percent after the Alabama election news.
Divergence between Fed and ECB policy was supposed to be bullish for the dollar, given it had widened the premium offered by U.S. two-year yields over German yields to 256 basis points from 188 basis points this time last year.
The last time the spread was that stretched was in 1999.
Yet the euro is currently up 12 percent on the dollar this year while the dollar is down 8 percent on a basket of currencies – an indication interest rate differentials aren’t everything in forex.
“Everyone is standing on the sidelines,” DZ Bank rate strategist René Albrecht said as German 10-year Bund yields hovered around three-month lows.
In Asia overnight, MSCI’s broadest index of Asia-Pacific shares outside Japan climbed 0.5 percent, while South Korean shares gained 0.8 percent and Hong Kong jumped 1.5 percent.
Japan’s Nikkei stock index finished 0.5 percent lower however, pressured by the stronger yen and shrugging off upbeat economic data that showed Japanese core machinery orders rose a more-than-expected 5 percent in October.
In commodity markets, oil was nudging back towards two-year highs hit in the previous session on an unplanned closure of the pipeline that carries the largest volume of North Sea crude oil.
Brent crude added 0.8 percent, or 51 cents, to $63.85 a barrel, after shedding 2 percent on Tuesday. U.S. crude added 0.7 percent, or 38 cents, to $57.52, after slipping 1.4 percent overnight.
Gold was near its weakest level in almost five months at $1,242.18 an ounce. It is often seen as a safe-haven play and can perform poorly when central banks like the Fed feel confident enough to raise interest rates.