It looks increasingly possible that the Democrats will get a majority in the House in November’s mid-term elections. This is an important point for markets. True, a victory for the Democrats is in no way a certainty. Their recent victory in Pennsylvania’s special election depended on a candidate who was unusual in that he was pro-life, pro-guns and anti-Pelosi; in other words, not typical. Looking ahead, similar candidates would probably lose in most party primaries, where ideological purity tends to be placed ahead of wider bipartisan appeal.
However, the main driver for a Democratic victory will be the economy. We remain convinced that the economic cycle is turning, and that the coming downturn will deepen as interest rates rise. Note, in particular, that corporate debt has expanded enormously in recent years to finance share buybacks and M&A deals. This is classic end-of-cycle activity, and it makes the whole economy much more vulnerable to interest rate increases. As we have described in earlier notes, a credit shock is likely as the Fed tightens policy.
…but not yet. For the moment, stock markets are relatively untroubled. Yes, there’s volatility—but “buy the dip” psychology is still pervasive, and we have not reached the panic stage yet. It will come.
In the meantime, bond markets are likely to fall a little more ahead of this week’s Fed meeting and the next hike. We would take the 3% level on the 10-year note as a buying opportunity. It is not far away. This should coincide with gold basing out for a decent rally with a rough target of US$1,550.
Malcolm Tulloch
The writer is director of the firm Tulloch Research. The company provides bespoke advice to clients on macro-opportunities in financial markets.
“Intuition is a product of accumulated experience”
Tobias Truman
I was excited to discover this website. I want to to thank you for your time for this wonderful read!! I definitely liked every part of it and i also have you book-marked to look at new things on your website.