(NYTs) PARIS — Stocks were mixed Wednesday in Asia and little changed in Europe after U.S. midterm election results showed major gains for the Republican Party, but the attention of investors was focused mainly on an important Federal Reserve meeting. In early trading, the Euro Stoxx 50 index, a barometer of euro-zone blue chips, was up less than 0.1 percent, while the FTSE 100 index in London was flat. The CAC 40 in Paris rose 0.2 percent, and the DAX in Frankfurt gained 0.1 percent. Trading in U.S. index futures suggested Wall Street stocks would open slightly lower.
The Hang Seng in Hong Kong led the advance in Asia with a 2 percent gain that took the index to its highest level since mid-2008, and the Australia benchmark S&P/ASX 200 index rose 0.5 percent. But the Shanghai composite lost 0.5 percent. Japanese markets were closed for a national holiday. “There hasn’t been an enormous reaction here,” David Thebault, head of quantitative sales trading at Global Equities in Paris, said, as the election outcome was in line with expectations. He said the main political question for investors were how health-care, clean energy and infrastructure stocks would hold up, as the new Congress and President Barack Obama addressed U.S. spending priorities. But, he added, “The real question today is the Fed.”
The U.S. central bank is expected to engage in another round of the policy known as quantitative easing, buying as much as $500 billion in bonds to stimulate the economy. While such a move could ease credit market conditions, flooding the markets with dollar liquidity could also weaken the exchange value of the dollar.
Investors were weighing the policy uncertainties in the aftermath of the elections, which saw the Republican Party capture control of the House of Representatives and expand its voice in the Senate, dealing a setback to the Democratic president.
In the foreign exchange market, the dollar remained under pressure as investors awaited details, due later in Washington, about the outcome of the Fed meeting. Analysts expected the Fed purchases to range from $500 billion to $2 trillion, but the extent of the program’s effect on unemployment and growth is uncertain. “The markets have already priced in a move, but how big is the question,” Dan Cook, chief executive of IG Markets, commented in a note on Wednesday. The euro was trading at $1.4036 Wednesday, up slightly from $1.4033 late Tuesday in New York. The dollar was trading at ¥80.65, up from ¥80.62.
From emerging Asia’s point of view, analysts said the added liquidity created by the Fed’s expected pump-priming measures is likely to lead to increased capital inflows into Asian markets. “The announcement itself could well be a non-event, since so much is priced in, but in the medium- and longer-term, Asia looks increasingly set to be on the receiving end of a lot more capital inflow,” analysts at DBS in Singapore wrote in a note. The bank estimated that Asia, excluding Japan, has seen inflows of more than $2 billion a day since April 2009, as investors have sought to capitalize on the region’s rapid growth and the higher interest rates that prevail there.
The trend of rising interest rates has been the most pronounced in India and Australia, which have staged a series of rate increases over the past year, most recently raising them by a quarter-point on Tuesday. While higher rates have been necessary to damp inflation pressures, they have also helped attract yet more inflows by investors in search of higher returns than those available in the United States and Europe, where interest rates are low. The inflows have prompted many emerging-market currencies to appreciate — with some especially rapid moves over the past two months — causing a number of countries to intervene in the markets to stem their currencies’ rises and triggering talk of “currency wars.”
The relative value of global currencies are set to be a main topic at a gathering of G20 leaders in Seoul next week. On Wednesday, South Korean President Lee Myung-bak said he hoped G20 leaders would agree on how to draw up current account “guidelines” aimed at easing global imbalances but admitted a severe standoff between the major economies, Reuters reported.
Reported by: David Jolly, Bettina Wassener and Christina Hauser, NYTs.
Cartoon: Miami Herald, Nov 2, 2010.
