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...

WTI oil futures sustain bullish bias but with some caution

The dollar index was sharply lower after mixed US labor data which showed hiring above expectations in October, but higher unemployment and lower wage inflation, warning that job growth may slow in coming months. Although the data suggest loosening in the labor sector’s activity that implies the Fed may also start slowing its policy tightening, the latest comments from Fed Chair Powell signal that the central bank will remain on path to continue its hawkish monetary policy stance. The dollar was down over 1.5% by the mid-US session on Friday and developing reversal signal on daily chart, as today’s strong fall has retraced nearly 61.8% of 109.35/113.02 upleg. Fresh bearish acceleration also penetrated thick daily cloud, with broken top (111.49) reverting to strong resistance and today’s close within the cloud would add to negative signals, reinforced by growing bearish momentum and south-heading stochastic emerging from overbought territory. This would  keep fresh bearish bias for possible extension through 110.75 pivot (Fibo 61.8% / 55DMA) towards psychological 110 support. Res: 111.49; 111.62; 112.16; 112.81 Sup: 111.19; 110.75; 110.22; 110.00

Oil prices are trading this Friday at their highest in nearly a month, benefiting from the looming tighter supply as an effect of market speculation around potential zero-Covid policy relief in China. In addition to the reduction in the OPEC+ production target of 2 million barrels per day for the month of November, the EU embargo and the planned cap on the price of Russian oil add to the pervasive tension in the market. In addition, the G7 member countries and Australia have agreed to set a fixed cap for the price of Russian oil rather than a variable rate in the interests of clarity, while the United Kingdom has aligned itself with the European Union by prohibiting British ships and service providers from contributing to the maritime transport of Russian oil sold above the fixed price set by the G7 and Australia. In fact, the services covered by the ban include crude oil transport insurance, a type of insurance called protection and indemnity (P&I) essential for oil tankers covering risks ranging from wars to environmental damage for amounts that can be colossal. Actually, the United Kingdom holds 60% of this market. On the other hand, the US dollar has weakened today against a basket of major currencies: US Dollar Currency Index (DXY) CFD (daily chart) On the WTI Crude Oil chart, by zooming out over the weekly chart, here is what we have now: WTI Crude Oil (CL) Futures (Continuous, weekly chart) So here on the long-term horizon, the overall structure of the crude oil market shows an upward trend. Until today we were in a bearish trend on the daily chart (in a mid-term horizon), however, by rallying above its previous month's high, the WTI might be signaling a trend change by switching into bullish territory again. Given the recent disagreements between Saudi Arabia-led OPEC+ – reducing its output of crude production – and the United States just as they are entering their mid-term elections, we could expect some manipulations on the oil futures market to push prices lower, the same way it has been done in the gold market over the past 20 years or so. However, the main difference here lies in the fact that the crude oil futures market – unlike the gold market which is mainly used for hedging purposes, portfolio diversification and speculation through paper trading – entails a much larger share of physical deliveries by major market players, which is what makes it more difficult to manipulate.

China's covid policy hasn't led to a nationwide lockdown, so it's more of a metaphor to talk about "reopening". However, the economic impact from a shift in the current zero-covid policy could be seen as a parallel to when other countries "reopened" in 2021 (and then were subject to renewed restrictions with the omicron variant). More importantly, the change in policy in China is expected to have global implications. So far, changes haven't been officially confirmed, so here are some things to keep in mind ahead of any possible changes. The latest Overnight, there were unverified twitter reports that the Chief Scientist at China's CDC Zeng Guang had said that economic development would be prioritized over covid prevention. This followed prior speculation about when China would pivot away from zero-Covid policy. Reports circulated earlier in the week that China had formed a commission to revise policy related to coronavirus, but that policy wouldn't change until March. Note that in March is when the new leaders appointed following the last CCP Congress take office. It was also reported yesterday that Chinese officials were modifying how covid restrictions were communicated in order to reduce the impact. Reportedly, officials were privately talking to certain businesses and locations to curb covid spread, instead of making broad public announcements. But they are still rumors Chinese health authorities are scheduled to hold a press conference on "targeted covid prevention" tomorrow. Many speculate this could be an opportunity to announce either a new policy, or to tweak existing policy in a way that would substantially reduce the economic impact. There had been rumors for a while that China could start relaxing covid measures after the CCP Congress, but that didn't materialize. As of yet, there hasn't been any confirmation that a change in policy is imminent, though that might come as soon as over the weekend. The implications China's economy has been significantly impacted by a combination of the zero covid policies and the near collapse of the housing market (which is also attributed to issues around covid). The mere rumor that restrictions could be lifted in a few months' time sent markets in China shooting higher. The rolling lockdowns created uncertainty around which industries and areas might suddenly be affected, slowing investment. A formal acknowledgement that zero-covid would be replaced with a policy that did not include lockdowns would likely substantially support the Chinese economy - and increase demand for imported goods, particularly from Japan, New Zealand and Australia. The outlook Slowing growth in China is one of the factors contributing to an expected global recession in the coming months. That contributed to lower oil prices, as well as other commodities. But a return of consumer demand could give China similar headaches as other countries: rising inflation and the need for the PBOC to start tightening policy. With the housing market already in trouble, higher interest rates could make the internal economy a little shakier. But increases in productivity could help global supplies. And the stronger yuan could support increased imports of raw materials.

Summary United States: FOMC Still Has Cover to Focus on Inflation Employers continued to add jobs at a steady clip in October, demonstrating the labor market remains tight and the FOMC will continue to tighten policy. The size of the December rate hike depends on the incoming data. October payrolls do not move the needle much toward a 75 bps hike, and they give the Fed cover to continue to focus on inflation. Next week: Small Business Optimism (Tue), CPI (Thu), Consumer Sentiment (Fri) International: Bank of England Hints at a Slowdown The Bank of England (BoE) raised its policy rate aggressively at this week's monetary policy announcement, raising its Bank Rate by 75 bps to 3.00%. The increase matched the consensus forecast; however, there were also signals from the BoE that the pace of tightening will likely slow going forward. Next week: Brazil CPI (Thu), Mexico Rate Decision (Thu), UK GDP (Fri) Interest Rate Watch: Will the FOMC Slow the Pace of Tightening in Coming Months? For the first time in this rate hiking cycle, the FOMC said that it would take into account the cumulative amount of tightening when deciding future monetary policy moves. Does a slower pace of tightening lie ahead? Credit Market Insights: Raising the Bar: EU Lending Standards Tighten in Q3 Last week, the European Central Bank (ECB) released its Bank Lending Survey for Q3-2022. Bank participants in the survey indicated that there was a net tightening of credit lending standards in the face of decades-high inflation and recession fears, with standards tightening for enterprises, home purchases and consumer credit. Topic of the Week: Homeownership Rises Over the Year, but Affordability Challenges Persist The latest Quarterly Residential Vacancies and Homeownership report was released on Wednesday. The report shows that the U.S. homeownership rate was 66.0% in the third quarter, up 0.6 percentage points over the year. Read the full report

There are only a handful of events next week but they will be crucial for markets. A divided Congress is the most likely outcome when Americans go to the ballots, setting the stage for two years of political deadlock. Meanwhile, the latest US inflation data will decide the pace of future Fed rate increases and by extension, the dollar’s fortunes.