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JPMorgan's Kolanovic says midterms may make Trump drop trade war

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A split Congress is the best outcome for global markets as it may ease trade war tensions and lead to a rally into the year-end.

Thursday 08, November 2018

(bloomberg)--JPMorgan Chase & Co. strategist Marko Kolanovic’s conclusions run counter to the thinking of some analysts who said that the best result for markets would have been for Republicans to retain both the US House and Senate. Administration policies last year were pro-business, but this year they have been “strongly anti-business” such as the trade war, protectionism and subsidies, he wrote. Therefore, a “red wave” could have been seen as an endorsement of the trade war.

“As the President cannot count on Congress or the Fed for more easing, he will need to do what is in his power to keep the economy rolling—drop the damaging trade war and turn it into a winning deal,” Kolanovic wrote.

The strategist sees gains likely in high-beta indexes such as the Russell 2000 and MSCI Emerging Markets.

As for the October sell-off, “it was essentially a miscalculation and a conflict between the US administration and Fed going into important midterm elections,” Kolanovic wrote. Calling the decline “one of the more curious events in US financial history,” he said it was fuelled by “systematic flows, low liquidity and hedge-fund deleveraging,” and “the catalyst was politics.”

He also said the administration may have miscalculated that the new North American Free Trade Agreement deal would be enough to prop up market sentiment, and that the Federal Reserve would provide dovish “cover” for the trade war.

“The catalysts for the October crash were miscalculations on both sides, and we hope lessons will be learned,” Kolanovic wrote.

TAGS : JPMorgan Chase & Co., Marko Kolanovic, Russell 2000, MSCI Emerging Markets

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