US Mid-term exit polls do have a hint of Republican favour about them. It is very early at this stage, but could there be a growing political swing capable of creating a lasting bottom for the US stock market? Some traders and investors, are certainly buying on the basis that a Republican Congress creating policy gridlock would, in their minds, be a good thing for the economy. However, what if what is happening is a bigger historical event that we have thus far considered? Will the Mid-terms see a return toward Republican candidates that flows through to the Presidential election? If so, then the Republicans may have absolute policy control in just two years time. This could mean a lot more than just a conservative agenda. It may also see a tough talking President, but perhaps more realistic in some ways approach to the Ukraine war. With the outcome being a possible faster pathway developing toward peace than currently seems achievable. Such a policy achievement by either party would go a long way in assisting the global, and particularly Federal Reserve’s fight against inflation. Not only would energy and food prices begin to moderate, but the Fed would not to have as high an end point for its interest rate tightening policy. A Republican agenda would undoubtedly include a reduction in government spending, perhaps further tax cuts and a stronger fossil fuel agenda. This is not political bias, just based in what both parties are saying they would look to do. As one of the world’s biggest bear market forecasters this year, since the first week of January, I find myself being forced to consider if some hope could develop around Ukraine in some way, and if energy and food prices could be lower and perhaps not as high a Fed Funds Rate in coming years. To be fair, we cannot be sure which party will more effectively handle these issues, but a very different policy stance could deliver different trajectories for recovery from what is clearly a downward spiral in both global events and economy at the moment. The stock market’s reaction in coming hours, and over the next few days, will potentially be telling from a very long term historic perspective. If stocks rallied on a substantial swing to Republicans, but could not hold those gains and was to fall back below levels we are seeing today, this unfortunate price development structure would confirm my central view that US stocks are still to fall a further 20%. If stocks were to still be headed higher in 3-4 trading sessions however, it may be that the great correction of 2022, as we had forecast, was now complete and behind us. Hold on to your hats, as the next few days could decide the fate of the US stock market for the next 2-6 years.

Join Senior Market Strategist & Trading Mentor Duncan Cooper as he watches price levels on the EURUSD daily and 15-minute charts.

US Mid-term elections appear likely to result in the Republicans winning both Houses. This may very well be taken as a positive for equity markets over coming days. The Biden administration, while welcomed to office by financial markets, has nonetheless delivered on being a very big spending government. Since coming to office there have been several controversial moves. The sudden nature of the withdrawal from Afghanistan. The lack of real diplomacy to help prevent war in Europe. Some believe the blowing up of Germany and Russia’s gas pipeline. Domestically, it has been all about spending, as the Federal Reserve has been fighting inflation. That President Biden has continued to claim the economy is the strongest in the world, has angered voters. It is difficult to argue the extreme inflation and slowing economy are entirely the Biden administration’s fault, but voters will be very clear in their feelings on the matter just the same. To them, if you are in the Oval Office, you are responsible. The Democrats campaign has at times looked a little lost, except to suggest voting Republican is somehow un-democratic? While the Republicans have run strong campaigns on inflation and crime. A strong Republican victory is entirely likely. This will mean President Biden will be unable for the next two years to achieve very much at all. He will be blocked at every turn, and the Republicans may seek to force spending cuts or they will allow the government to run out of money. Markets may very well initially cheer a return to greater fiscal responsibility, but a little further down the track there is the risk of a true funding crisis for the government. If the Republicans do not allow the deficit ceiling to be raised unless Biden cuts spending, and Biden digs in, refusing to do so, then we could very well see the worst government funding crisis this century. Such a situation would come on top of a faltering economy and aggressive Fed interest rate hikes. Both stocks and property are already in decline. The added impetus of a true financial crisis for the US government may finally push investor sentiment off a cliff. Indeed, potentially bursting the US dollar bubble. For now, we should see some form of relief rally in stocks as the Republicans win big, but the longer time horizon will have likely darkened further. One more small point: Trump is already campaigning for the White House and looks set to win another term in two years time. (I did forecast both his and Biden’s victories.)

As we start a new week stock markets are trapped in a narrow range. This is to be expected as this week is jam packed full of event risk. CPI reports for October will be the highlight of the economic calendar, especially US inflation that is scheduled for release on Thursday, UK Q3 GDP is also worth watching to assess how much the UK economy was impacted by September’s political and fiscal chaos. However, the markets also must navigate some choppy political waters with US Midterm elections on Tuesday 8thNovember and more uncertainty around whether China will exit its zero Covid policy.  A Republican victory and the prospect for stocks  While inflation reports come every month, we believe that the real risk for US and global assets right now is the US Midterms. There is concern from both sides of the political aisle: Republicans worry that if they don’t win power in both the House of Representatives and the Senate then government spending will surge to unsustainable levels, and Democrats worry that a Congress controlled by the Republicans will further enforce conservative social values on all states, and it could lead to more bipartisan gridlock in Washington. So, what would the financial markets prefer? Typically, a Republican win is good for stocks as they are seen as being more supportive of the economy. We believe that a Republican victory is positive for stocks and could lead to a weaker dollar. This is because a Republican Congress would likely limit government spending, which could help bring down inflation. Thus, a Reublican victory is seen as leading to a less hawkish Fed, something that the markets have been hoping for, without much luck, for months.  However, we believe that the real reason why the markets would prefer a Republican victory is not because they want the Republicans in power particularly, but because it would cause bipartisan gridlock, and render President Biden a lame duck. There is nothing that investors and traders love more than stasis in Washington, when politicians from both sides are blocked from enacting policy that could upset markets. Financial markets love certainty, and sometimes certainty comes from Washington fighting amongst themselves rather than fighting with financial markets.  A Washington Insurrection 2.0?  However, there is a caveat to the “Republican win is good for stocks story”, even if the Dow has surged the day before the election. Right now, the polls are suggesting that the Republica s are likely to easily win the House of Representatives with the Senate still to play for, as the Republicans only hold a narrow lead. However, the big risk to this election is that we get a repeat of the outcome of the November 2020 election result, when President Trump did not accept the outcome of the election and endorsed an insurrection on Capitol Hill. If there are candidates who do not win, and do not accept the result then this could significantly lift volatility, stocks could fall, and the dollar could attract significant haven flows. The risk of an uncertain outcome should not be dismissed as a low probability event, and traders should manage their risk with caution in the next few days. In the state of Pennsylvania, where President Biden won by a narrow margin in 2020, lawmakers have already said that the outcome of the Mid-terms won’t be determined immediately, and it could take days before we get the results.  The debt ceiling: will Congress and the White House be on a collision course?  There is also a longer-term risk from these elections: the statutory debt ceiling. The US debt ceiling will need to be lifted at some point in Q1 2023, however the exact date is not known due to the uncertainty of tax intake and Federal spending levels. If the Republicans win the US Midterms then they could be emboldened, with some Republicans likely to demand spending cuts before they agree to lifting the debt ceiling. This could lead Congress on a collision course with the White House. While the danger of a US debt default is a tail risk right now, the stakes are high when it comes to politicians playing with the fiscal reputations of the world’s largest economies – look at what happened to the UK in September. Thus, a fight over raising the debt ceiling in the coming months could weigh on US bonds – causing yields to surge. It could also weigh on stocks, as Federal spending cuts in an economic downturn could hurt the outlook for the US, and thus global growth.  Beijing sticks with its Zero Covid policy  One of the biggest drivers of risk appetite as we move to the end of the year is China and whether it will lift its zero covid strategy. On Friday, unfounded rumours suggested an...

Whereas last week ended on the note that we may be approaching the point of peak hiking pace, this week brought a reality check. The Federal Reserve hiked rates by 75bp on Wednesday and the widely expected hike was accompanied by Powell’s hawkish message that financial conditions need to be tightened further. In contrast to any speculation around a possible Fed pivot, Powell stated clearly that 'it is very premature to be thinking about pausing' even if downside risks to growth are building. As a result, we adjusted our call to include a 50bp hike in February in addition to our earlier forecast of one more 75bp hike in December (see Research US - Fed review: Another hawkish 75bp hike - We now expect 50bp also in February, 2 November). The futures market is now pricing terminal rate at around 5.20%, 15bp higher compared to pre-meeting levels at 5.05%. The Bank of England also hiked the bank rate by 75bp to 3.0% as expected on Thursday but with a dovish tilt compared to the Fed. Hence, we expect smaller hikes going forward and foresee the peak rate in February at 3.75%. Our view is for less hikes than the market is currently pricing in as we expect GDP data next week to confirm that the economy is already in recession. That being said, risks remain skewed towards additional hikes. Norges Bank (NB) also delivered a dovish 25bp hike on Thursday, sending the sight deposit rate to 2.50%. While our call was for a 25bp hike, analysts and markets (37bp priced) were evenly split between 25bp and 50bp. This led to considerable market moves in rates and FX markets post announcement. This week saw a sharp reversal in risk sentiment as premature optimism regarding the big central bank pivot faded. Broad USD as measured by the DXY index gained 1.9% while EUR/USD broke below the 0.98 level. At the time of writing on Thursday, both the US and German 10y yields were 15bp higher on the week. The easing in global financial conditions that we witnessed in October and that works against central banks’ efforts and interests now seems to have halted, which means hawkish communication still does the trick. Next week, the focus will be on US midterm election on Tuesday. Republicans are favoured to win control of both house and senate, although the senate race remains a close call. If republicans win the senate with a slim margin or if democrats are able to retain the senate, market reaction should be quite muted, as major changes in fiscal policy would be difficult to pass. The (modest) risk-scenario for markets would be a clear victory for republicans also in the senate, as this could increase the risk of more expansionary fiscal policies amid the looming recession. We see the risk as fairly unlikely for now, however, as politicians are likely well aware of the inflation risks. US October CPI will also be in focus next week. We are looking for another high print at +0.7% m/m / +8.0% y/y. There are also several Fed speeches scheduled throughout the week, which will of course be interesting after this week's meeting. Several ECB speakers on the wires as well starting with Lagarde on Monday. Friday brings UK GDP growth for Q3 which we expect will be in negative territory (-0.3% q/q), marking an official start of the recession. In China, we get exports on Monday and CPI data on Wednesday but these are unlikely to move the markets. Download The Full Weekly Focus

Europe Despite yesterday’s negative US finish, Asia markets bounced back strongly today on more unsubstantiated reports that the Chinese government is looking at a reopening strategy as it looks to navigate a path out of the straitjacket of its current zero-covid policy. These reports, which still haven’t been confirmed in any official capacity, have prompted a huge relief rally in equity markets, despite concerns that any reopening is unlikely to happen in the immediate future, and the very real risk that it is merely a sucker’s rally. As we head into the winter months it seems highly improbable that China would be able to reopen its economy in any meaningful or sustainable way without triggering a more widespread outbreak of Covid infections. Notwithstanding all that investors are piling in just in case, in a classic case of FOMO, fear of Missing Out. Further reports that China is also looking at relaxing restrictions around flight suspensions which penalised airlines that brought Covid cases into the country have also boosted airlines, as well as Rolls-Royce shares. In their Q3 numbers yesterday Rolls-Royce blamed lower than expected (large engine flying hours) EFH numbers of 65% on the various covid disruptions causing problems with air travel in the Asia region. A return to normal in Asia markets would be enormously helpful for Rolls-Royce as it navigates its way back to some form of normality. Whatever the merits of these reports, markets are reacting to them and surging higher, and the results are being reflected in a sharp rally in basic resource stocks, pushing up the likes of Antofagasta, Anglo American and Rio Tinto, as well as other China exposed companies with HSBC, Prudential and Standard Chartered all pushing higher. Airbus shares are also making gains after it was reported that the company had signed a $17bn jet deal with China, helping to lift the CAC40 in the process, The DAX is also having a good day with German Chancellor Olaf Scholz in China on a diplomatic visit, as companies who do a lot of business there getting a lift, with Continental, Volkswagen and Mercedes all outperforming. Adidas shares have jumped sharply on reports that the head of Puma, Bjoern Gulden would be joining the company as the new CEO. US US markets opened strongly higher, helped by the positive read across from Asia and European markets, while the latest US payrolls report showed that 261k jobs were added in the month of October, and the September jobs number was revised up to 315k. The strength of today’s jobs report served to highlight why Fed chairman Jay Powell was so hawkish earlier this week, although the unemployment rate did edge higher to 3.7%, as wage growth slowed to 4.7% from 5%. Coinbase shares jumped higher after beating on subscriber numbers in its Q3 numbers which rose by more than expected to 8.5m comfortably beating forecasts of 7.8m. Total revenue fell by 55% to $590.3m as did trading volume which fell 51% to $159bn. Losses increased to $2.43c a share. Carvana shares dropped after the online used car company reported worse than expected quarterly numbers, which rather bode ill for its sector peer Vroom who report their latest Q3 numbers next week. China based ADR’s also saw big gains on the back of this morning’s reopening story, with the likes of Alibaba, JD.Com, Tencent, and Pinduoduo also rising sharply. BioNTech shares have also surged after it was reported that German Chancellor Olaf Scholz had agreed a deal with China to supply vaccines to all China expats. Pfizer shares have also edged higher. FX The US dollar initially rallied strongly in the wake of today’s strong US payrolls report, however it soon reversed course as profit taking kicked in after what has already been a strong week for the greenback. The pound has rebounded modestly after the heavy declines of yesterday, although it’s still on course for a heavy weekly loss, after Bank of England chief economist Huw Pill said that the bank was trying to strike a balance between hiking rates too aggressively, without causing too much damage to the UK economy. The problem with trying to do that, and many politicians will attest to this, is if you try and be all things to all people you usually end up pleasing neither, and that is the real risk in the Bank of England’s approach. The level of inflation is so high it’s already doing enormous damage to the UK economy, and the risk is that in trying to steer a middle ground the current high levels of inflation could well take years to come down. The euro has also undergone a strong rebound on the back of Scholz’s China visit amidst hopes of a significant trade uplift. The commodity currencies of the Norwegian krone, Australian...