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Chandler: No Clear Market Reaction to Obama

It is difficult to detect a clear market reaction to the US electoral results. The US dollar is broadly firmer, but after yesterday's big setback, it seems largely technical in nature.

Some suggest the US dollar gains are really optimism that newly-elected Barack Obama will take decisive action to stem the economic malaise. However, if that were the case, would the S&P be called lower? The bond market is also under pressure, with 10-year yields up about 6 bp.

With the election over, political focus will quickly shift toward Obama’s Treasury Secretary nominee and a new fiscal stimulus plan from Congress.

During the campaign Obama supported a $175 billion stimulus package, but as it moves through Congress it is bound to get bigger and something closer to $200 billion may be proposed.

There are some pro-growth proposals that Obama’s centrist economic advisors are thought to be considering. One is a cut in the federal payroll taxes. This would likely get widespread business and Republican support. A 12.5 percent cut would boost take home pay by $125 billion, for example.

States and local governments are being squeezed by the “new federalism” which shifted the burden from the federal government to state and local governments. They are now being squeezed, albeit not uniformly. An across-the-board increase of say, cash grants, from the Treasury to state and local governments would be direct assistance.

The Democrats increased their hold of both houses, but appear to have failed to achieve the filibuster proof majority. Still, with the strength of the electoral outcome, it is possible that a couple of moderate Republican Senators, like in Maine, could provide the Dems with some help.

Among other things, this could put four items on the legislative agenda that might not otherwise be there: Democrats want to empower judges to modify mortgages—(private contracts) in bankruptcy court. They also want to empower medicare to negotiate for lower prices—something thus far prohibited.

An Obama Presidency:

Democrats may also try to end tax breaks companies get on income earned overseas. The Democrats can be expected to push alternative energies, including new efficiency standards and could potentially impose a windfall tax on oil profits. Utilities might be required to buy more alternative sources energy. There will also be concern about the impact on the incentive structure of the sharp decline in oil prices in recent weeks.

The Dems may not need a filibuster-proof majority to push for the Employee Free Choice Act that allows workers to unionize on the basis of a simple majority. In effect, the bill was rejected by a single vote (Dems couldn’t stop the filibuster, one of more than 100 that had stalled Dem initiatives). Two Republican Senators that opposed the bill were ousted (Domenici of New Mexico and Warner of Virginia).

The forces at work globally, notably de-leveraging and a severe economic downturn in major centers ultimately will drive the asset markets and the foreign exchange market.

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Marc Chandler is the global head of currency strategy for Brown Brothers Harriman. He has been analyzing, writing and talking about the foreign exchange market for more than 20 years. He is a regular guest on CNBC and his essays have been published in numerous economic and business publications. He previously served as the chief currency strategist for HSBC Bank USA and Mellon Bank.