After hearing about midterms since, well, the day after the 2016 election, markets will finally vote via asset prices in the hours and days after voters make their decisions on Tuesday. Market expectations cannot be clearer; prices are calibrated to wake up to confirmation of a small Democratic majority in the House and a slightly stronger Republican majority in the Senate. Anything outside of that will shift several equilibriums, with consensus being that a better Democratic showing would push down equities, bond yields and the USD, while the opposite would greet a better Republican showing.
But as always, so much of market expectation is trying to guess what the "other person" will do with their holdings rather than perfect foresight of economic developments. After markets digest the results on Wednesday however, it will need to quickly shift its attention to some immediate issues between then and mid-December, when attention turns to holidays and year-end closing of business.
Believe it or not, there is an FOMC meeting on Thursday, which will be the biggest yawner of the year. All FOMC drama is focused on December. The real drama markets will be focused on is whether the back and forth with China on trade will get clearer ahead of the G20 meeting in Argentina.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
Expectations to keep rates unchanged at 1.5%
Expectations to keep rates unchanged at 1.75%
Expectations to keep rates unchanged at 2.25%
KEY MARKET MOVING ECONOMIC RELEASES
Expectations for a drop to 59.4
Expectations for consistent MoM increase of 0.2%
EZ Composite PMI
Expectations for a constant reading at 52.7
Expectations for no change
U.K. Q3 GDP
Expectations for print of 1.5% YoY
Asia/China and Japan
Expectations for the rate to drop to 4.4%
Japan Trade Balance
Expectations for a smaller trade surplus
The EUR continues to be trapped in an endless rotation of bullish and bearish minicycles interspersed between periods of consolidation going back to May. Potential EC – Italian budget confrontations have provided near term concerns causing euro weakness and remain a volatile component for the markets. Expect further consolidation and sideways trading for now.
The GBP too continues to mirror much of the movement of the euro colored strongly by news headlines related to the Brexit negotiations. The market seems to be pricing an eventual deal with the EC but PM May will have to face further hurdles in getting the Tory party and Parliament to sign off on any final Brexit negotiation. However, there was a little bit of progress and hope on a Brexit deal this week that is keeping the GBP up. Expect further consolidation ahead.
The JPY remains difficult to forecast as the market shifts ground very quickly over a wide variety of variables. One week, rising U.S. interest rates causes JPY weakness followed immediately by U.S. equities collapsing sending the market into risk-off mode causing the JPY to strengthen. Expect more volatile times ahead.
The CAD continues to reflect the most recent news cycles and vacillates back and forth between periods of strength and weakness. Rising oil prices and the USMCA help to boost sentiment, but most recently, the CAD has been weakening due to weak Canadian economic data. The Bank of Canada raised interest rates by 25 bps as expected.
The CNY has stabilized but remains vulnerable to further weakness. Conflicting reports about U.S.-China trade negotiations make it unclear where to go from here, but clearly there is positive sentiment regarding the renminbi right now. Expect sideways movement that is driven by headline risk.
The AUD was weak and continuing in a downtrend channel since January’s peak near $0.8100. There were ongoing concerns about weaker demand for Aussie commodity exports from a Chinese economy that was starting to feel the impact of tariffs. However, better than expected trade data was released and has given strength to the AUD. Expect consolidation ahead.
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