Wall St. Set to Cheer Republican Gains

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Reuters

Wednesday November 6, 1:56 am ET By Ross Finley and Denise Duclaux

NEW YORK (Reuters) - The battle for control of Congress raged into the morning hours on Wednesday, but Republicans scored huge victories that could add more fuel to a four-week rally on Wall Street.

Republicans, as widely expected, retained control of the House of Representatives, according to early calls by U.S. television networks. Many races remained too close to call in the hotly-contested Senate, but Republicans were making major headway and threatened to wrench control from the Democrats.

For equity investors, should the Republicans grab both House and Senate when all votes are counted, "it will be music to their ears because Wall Street favors Republicans," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

Early on Wednesday, television networks were projecting that the Republicans had pocketed 49 Senate seats and needed to win only one more of three crucial seats to win control of the Senate.

"People are going to conclude that out of this whole process that we're going to get more spending, more economic stimulus, so that's not good for bonds and it is good for stocks," said Jim Glassman, senior economist at J.P. Morgan Chase.

Safe-haven U.S. Treasury bonds fell in part on expectations that U.S. stocks will rise after the opening bell and also on the view a strengthened GOP agenda will lead to further tax cuts and higher deficits. Stock index futures made hefty gains in Asian trading and the dollar also surged against the yen.

But even as election results rolled in, an expected interest-rate cut from the Federal Reserve on Wednesday in the face of a faltering U.S. economic recovery and sluggish corporate profits remained a focus for investors.

"For markets the cost of money is always more important than political trends," said A.C. Moore, chief investment strategist at Dunvegan Associates in Santa Barbara, California.

If that weren't enough to chew on, Harvey Pitt, the embattled chairman of the U.S. Securities and Exchange Commission, tendered his resignation on election night.

GOP MOMENTUM BUILDING

Republicans are usually viewed as more friendly to business and a Republican-controlled House and Senate could raise the likelihood of further tax cuts. In turn, bond yields could rise on the perception such tax cuts may increase already-bloated deficits and flood the market with more debt.

Drug and defense stocks rose on Tuesday in anticipation of a sweeping Republican victory and could continue their trek higher on Wednesday. But some analysts feel the Fed's meeting on Wednesday afternoon will keep a cap on the broad market.

"You will get probably not as much the market as a whole rallying, but you certainly will have stronger leadership from stocks that are likely to benefit from a Republican controlled House and Senate -- the obvious ones are drugs and defense," said John Davidson, president and CEO at PartnerRe Asset Management, which oversees $4.9 billion in assets,

All 435 House seats, 34 of 100 Senate seats and 36 state governorships were at stake on Tuesday. A Republican Senate win would give the party control of both chambers of Congress. That would be a huge boost for President Bush and could give him new authority to wage war against Iraq.

"The simple thing you can say is it looks like the biggest winner is the president. Because he's the one who's going to get credit for having stemmed the tide," said Glassman.

FED MEET IN SPOTLIGHT

But the Fed's policy-setting meeting on Wednesday was jockeying for the spotlight as investors have already bet on at least a quarter percentage point cut in the 1.75 percent fed funds rate to prop up the anemic economy.

Stocks rose on Tuesday. The broad Standard & Poor's 500 index (CBOE:^SPX - News) has climbed for three straight days on hopes for a rate cut after a run of weak economic data, including a rise in the jobless rate, a plunge in consumer confidence and a second straight month of contracting manufacturing.

Many investors are betting corporate profits are slowly on the mend, despite an economy that is still struggling to gain momentum and is still shedding jobs as companies try to cut costs. The three major U.S. stock indexes last Friday logged their fourth week of gains in a row.

Stock index futures made sizable gains, with December Standard & Poor's 500 contracts (SPZ2) up 10.30 points at 924.30 and Nasdaq 100 futures (NDZ2) up 13.50 points at 1,065.

Seen as the party more likely to pursue an aggressive tax-cutting agenda, Republican gains sent Treasuries lower in Asian trading in part on the expectation that already-bloated budget deficits could get bigger.

In Tokyo trading, U.S. Treasury securities fell, with supply pressure ahead of an $18 billion benchmark 10-year note sale due to be sold Wednesday, along with gains in stock futures, adding to the selling.

Ten-year Treasury notes (US10YT=RR) fell 10/32 to 102-3/32, pushing their yield up to 4.11 percent from 4.07 percent at the New York close on Tuesday.

The dollar made its biggest gain against the yen since mid-October on Wednesday in Asian trading to a session high near 122.35 yen (JPY=).

"The stronger hand of the president is probably not bad for the currency," said Glassman.

-- Anonymous, November 06, 2002


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