Dollar seesaws as investors assess risks of deadlock after midterms
The dollar seesawed versus the euro and yen in a volatile session as traders scanned U.S. midterm election results for early insights into the prospect of Congressional gridlock.
The Democratic Party is expected to win control of the U.S. House of Representatives, with the Republicans seen likely to keep their majority in the Senate.
A split Congress may hurt the dollar temporarily: a Democratic win in one or both chambers is likely to be seen as a repudiation of President Donald Trump and the policies which have boosted corporate growth.
“If Congress is split, with the Democrats controlling the House and Republicans the Senate, the prospect of legislative gridlock that would make it difficult for policies such as the President’s middle class tax cut to pass is negative for the U.S. dollar,” said Kathy Lien, managing director of currency strategy at BK Asset Management in a note.
The dollar index, a gauge of its value versus six major peers, lost 0.2 percent to trade at 96.12.
The greenback has outperformed most of its key rivals this year, benefiting from a robust domestic economy and higher interest rates, with investors focused on whether the mid-terms could disrupt this stellar run.
The dollar is also likely to be supported by minutes of the last Federal Open Market Committee (FOMC) meeting due out on Thursday, in which the Fed is seen likely to reaffirm its intention to lift its policy rate above 3 percent over the next year.
GBP/USD Above 1.31 Handle on Increased Risk Appetite Over US Election Results Update
No sight of a Brexit deal on the horizon, but investors are continuing to bet that either the EU or the UK will break and make concessions.
The GBP/USD is trading above 1.31 region supported by increased risk appetite in broader markets on fluctuating result updates from US midterm elections resulting in Brexit concerns falling by the wayside heading into Wednesday’s London market session as USD flows are once again, driving the overall market structure. Developments on Brexit remain scant, but the flow of headlines has continued non-stop, with only five months left until the final Brexit date and the EU-UK divide remains as wide as it always has, with no movement on any solution on the Irish border dispute, nor on how much access the UK will keep to the European customs market post-Brexit. Hopes have pinned to the high side recently, fueled by speculative headlines that a previously-unknown Brexit deal may be forthcoming soon, but those hopes were crushed early in the week when all sides confirmed that they have made no progress on making mutually-beneficial concessions.
Muted Brexit Updates & Lack of High Impact Macro Data Resulted in US Election Results Driving The Pair’s Momentum
As of writing this article, GBPUSD pair is trading near flat at 1.3111 up by 0.08% on the day as headlines from US election updates keeps the pair highly volatile with both sides of pair fighting for control of momentum. US mid-term elections are gripping global financial markets for the time being, and investors are leaning into the Dollar-short camp as the American Democratic party, President Donald Trump’s main opposition, looks set to secure a foothold in the US lower House of Representatives. However there is also chance for a Republican victory in both Chambers which would be highly hawkish for US Greenback and also enable Trump administration to push for more stimulus aggressively. Such a situation would lead to US Fed raising rates above neutral level to avoid overheating of the economy. Investors now await final update as results for majority of seats in both house and senate have been declared.
Little of note is slated for the economic calendar for both the UK and the US in today’s latter market sessions, leaving Brexit and American election headlines to control the broader flow of risk appetite heading through Wednesday. When looking from technical perspective, the GBP/USD is trading at the highest levels since mid-October, and the Relative Strength Index (RSI) on the daily chart is far from the 70 level which indicates oversold conditions. This is one bullish sign. Also, the pair is trading and looks comfortable above the 50-day Simple Moving Average. Downside momentum is diminishing. The 1.3250 area capped the pair during several days in the middle of last month. 1.3300 is a round number and also was the peak in September. Beyond these levels, we are back to prices last seen in July, with 1.3360 serving as the next cap. Looking down, 1.3290 was a swing low in mid-October. 1.3040 separated ranges in October and also in early November. Further down, 1.2960 was a stepping stone on the way up, and 1.2925 was a swing low in early October.
Stock Market News
Stocks lose momentum, dollar softens after Democrats win U.S. House
Wall Street stock futures and Asian shares lost steam on Wednesday after Democrats won control of the U.S. House of Representatives, boosting the party’s ability to block President Donald Trump’s political and economic agenda.
But European stocks were expected to rise, with spread-betters looking at gains of up to 0.5 percent in Britain’s FTSE .FTSE, 0.8 percent in France’s CAC .FCHI and 0.7 percent in Germany’s DAX .GDAXI.
The Democrats’ House win creates a hurdle for Republicans to easily pass legislation through both chambers of Congress, clouding the outlook for some of Trump’s key economic proposals.
Major U.S. broadcasters projected the Democrats were headed to a gain of more than 30 seats, well beyond the 23 they needed to claim their first majority in the House in eight years, while the Republicans were seen gaining a few more seats in the Senate.
While both outcomes were broadly in line with market expectations, a reason markets did not sell off, the prospect of political gridlock creates some uncertainty for investors. The dollar weakened against most of its major counterparts.
“In the short term, a Republican loss in the House should amplify risk market volatility, detract from positive sentiment, and be positive for U.S. rates,” said Ed Al-Hussainy, senior rates and currency analyst at Columbia Threadneedle Investments at Minneapolis in the United States.
“Long dollar and short Treasury futures positioning is relatively stretched going into tonight and could exaggerate short term moves in these prices,” he added.
In addition, the newly empowered House Democrats will have the ability to investigate Trump’s tax returns, possible business conflicts of interest and allegations involving his 2016 campaign’s links to Russia.
In equities markets, U.S. S&P500 futures ESc1 last traded 0.1 percent higher and MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS were up a similar amount, but they were far off highs hit earlier.
Where Will Facebook’s Revenue Growth Come From?
Facebook (NASDAQ:FB) posted disappointing revenue growth for the third quarter. Management warned of a significant slowdown in revenue growth heading into the back half of the year, and the results were actually better than what that guidance suggested. Still, Facebook fell slightly short of Wall Street analysts’ consensus estimate. Management also reiterated its expectation for a further slowdown in revenue growth in the fourth quarter.
With the slowdown in revenue growth finally hitting Facebook, it’s worth examining its current sources of revenue growth and how that might change over the next few years.
Facebook is seeing a shift in its usage from the feeds in Facebook and Instagram to its Stories-format products across each of its four main apps. Over 1 billion people use Facebook’s Stories products every day. CEO Mark Zuckerberg thinks Stories will be more popular than sharing in feeds as soon as this year, and it’ll eventually become a bigger source of revenue for Facebook than ads in feeds.
But it’ll be a long time still before Stories becomes a major source of revenue for Facebook. “From a business perspective, feeds will drive the majority of our growth over the next couple of years,” Zuckerberg told analysts on the company’s third-quarter earnings call.
Stories remains undermonetized compared to the ad-saturated Facebook news feed. Not only are ad prices substantially lower than feed ads, but Facebook hasn’t quite figured out how many ads users should be seeing in Stories. It’s going to take years to figure out the optimal point and to get advertisers to shift their spending to follow users.
In the meantime, Facebook’s well-established feed-based ads will be the main source of revenue growth. But with ad load saturation and time spent in the apps increasingly split between the feed and Stories, there are only two levers for growth: increases in the user base and increases in ad prices.
Facebook’s user growth is primarily coming from markets with lower revenue per user. CFO Dave Wehner pointed out that its top growing markets were India, Indonesia, and the Philippines. Meanwhile, daily active users in the U.S. and Canada were flat for the second straight quarter, and around 4 million users were lost in Europe over the last two quarters, partially due to the impact of GDPR. As a result, revenue growth acceleration ought to lag user growth acceleration.
Facebook can also grow revenue from feeds by driving higher average ad prices. Ad prices increased 7% across all of Facebook’s products (feeds, Stories, Messenger, etc.). Results from the recent past indicate ad prices within feeds are growing at a much faster rate, and the rapid growth of Stories in the last six months or so has driven down Facebook’s reported average ad price. Facebook can continue driving higher average ad prices in feeds with continued ad product innovation. It ought to continue benefiting from the secular shift of ad dollars to digital while ad inventory remains relatively stable.
As Facebook moves from several factors driving feed revenue growth to just one or two, investors could see continued pressure on revenue growth in the near term.
Long-term growth drivers are promising
There are a couple of big long term growth drivers that make Facebook an appealing investment.
As mentioned, Stories is accounting for an increasing percentage of sharing and time spent on Facebook’s products. It’s going to take some time for management to figure out the optimal monetization level of Stories, but it’s shown the ability to make those kinds of transitions in the past. The shift to mobile was challenging, but Facebook emerged a much stronger company after optimizing news feed ads. The shift to Stories ads from feeds could follow a similar trajectory.
Secondly, Facebook will benefit from the secular growth of the advertising market in emerging markets. A larger and larger percentage of Facebook’s user base lives outside of the U.S. and Western Europe. The share of Facebook’s daily active users in America, Canada, and Europe fell from 37% to 31% over the last two years as Asia-Pacific and the rest of the world grew at a much faster rate. As those emerging markets start to close the gap in revenue per user between themselves and the U.S. and Europe, Facebook will benefit just by virtue of its massive user base.
Facebook faces some headwinds as its transitions to more Stories ads, but the long term still looks very promising for the digital advertising behemoth.
Crypto Prices Gain; SEC Stops Accepting Comments on Bitcoin ETFs
Cryptocurrency prices gained on Wednesday as the U.S. Securities and Exchange Commission stopped accepting public comments on Bitcoin ETF proposals, but did not announce an official decision or timeline of when such funds would be launched.
Bitcoin gained 1.8% to $6,569.2 by 12:00 AM ET (04:00 GMT) on the Bitifinex exchange.
Ethereum jumped 5.9% to $221.79, and Litecoin rose 3.4% to $55.665. XRP traded 5.0% higher to $0.53954.
Citing the possibility of “fraudulent and manipulative acts and practices,” and the fact that Bitcoin futures are “insignificant” in size, The SEC denied nine Bitcoin ETF applications from multiple exchanges on August 22.
“[…] the Exchange has offered no record evidence to demonstrate that Bitcoin futures markets are ‘markets of significant size.’ That failure is critical because, as explained below, the Exchange has failed to establish that other means to prevent fraudulent and manipulative acts and practices will be sufficient, and therefore surveillance-sharing with a regulated market of significant size related to bitcoin is necessary.”
However, the agency backtracked on its decision on August 23 and said that its officials decided to re-evaluate their actions and would start soliciting public opinion on the issue.
In other news, volatility of Bitcoin has sunk to its lowest in two years, Reuters reported on Wednesday.
The cryptocurrency surged over 1,300% in 2017 to a record high of almost $20,000 in December. So far in 2018, however, it has slumped as much as 70%, before settling into a period of relative stability since September.
Risk Disclaimer: The information contained in this market review should not be construed in any way, as containing investment advice and/or a suggestion and/or solicitation for any trading activity and financial transaction. There is no guarantee and/or prediction of future performance. EuropeFX, its affiliates, agents, directors or employees do not guarantee the accuracy and validity of any information or data made available and assume no liability as to any loss arising from any investment based on the same. Trading Forex/CFD’s carries a high level of risk and can result in the loss of your whole investment. Forex/CFD’s are leveraged products and therefore Forex/CFD’s trading may not be appropriate for all investors. It is recommended that you do not invest more money than you can afford to lose to avoid significant financial problems in the case of losses. Please make sure you define the maximum risk acceptable for yourself.