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Pre-Market Primer: Bonds Rally, Equities Drop After Obama Reelection

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It's the Fed and the fiscal cliff, stupid.

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MINYANVILLE ORIGINAL Equities are down and bonds are up after Barack Obama's reelection victory.

President Barack Obama handily won by a larger-than-expected margin in the electoral college and broke 50% in the popular vote. Democrats held the Senate and Republicans held the house. Essentially, the uncertainty of the election is gone, and we will probably have more of the same Congressional gridlock and dovish monetary policy.
After a significant rally yesterday, stock futures are down, signaling that the major indices will fall today.
  • Dow (INDEXDJX:.DJI) futures fell 0.68% to 13,111.
  • S&P 500 (INDEXSP:.INX) futures dropped 0.62% to 1,416.30.
  • Nasdaq (INDEXNASDAQ:.IXIC) futures slipped 0.66% to 2,658.00.
Treasury yields fell the most in two months:
  • Two-year notes rallied. Yields fell to 4 basis points to 0.27%.
  • 10-year yields fell 9 basis points to 1.67%.
The dollar fell against the yen, euro, and loony. Gold futures rose 0.33% to $1,720.60.
For the markets, the future of the Fed was of huge importance. Mitt Romney has said that he wouldn't reappoint Ben Bernanke for another term in 2014, and presumably, will not appoint a similarly dovish Fed chief. The rise of gold and the dollar's fall relative to other currencies reflects the expectation that the Fed's easing will continue. For its third round of monetary easing, the Fed is making $40 billion in asset purchases each month indefinitely.
Since 1964, government bond yields have been lower under Democratic presidents. Ten-year notes tend to fall 40 basis points in the first month after a Democratic victory, and rise 19 basis points after a Republican win. In 2004, when exit polls suggested that John Kerry won, yields fell sharply, only to whipsaw up when Kerry conceded to George W. Bush.
The decline in equities could be reflecting the near-term challenges that President Obama will face in avoiding the 'fiscal cliff' of deep spending cuts and sharp tax hikes that could destroy the economic recovery and possibly throw the United States into another recession. Gridlock is likely to continue, since the Republicans held on to a majority in the House of Representatives. We could face another ugly fight like the one over the debt ceiling in August 2011 in the later part of this year.
In Europe, equities rose despite bad economic news and more signs that the contagion is reaching the core of the eurozone. German industrial output fell for a second straight month in September. Production fell 1.8% from August and 1.2% from last year. European Union-wide retail sales fell 0.8% on a yearly basis in September. Sales were weakest in Spain due to a sales tax hike that went into effect.
Greeks are protesting for a second day ahead of the latest austerity vote. To secure the next much-needed tranche of aid from the troika, the Greek Parliament has to approve 13.5 billion euros of pay cuts for public workers and spending cuts. Greece is also expected to privatize public utilities and reform labor laws to make it easier to hire and fire workers.
Microsoft (NASDAQ:MSFT) is rumored to be working on a gaming tablet, leveraging its popular Xbox video game platform.

Twitter: @vincent_trivett
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No positions in stocks mentioned.
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