Market movers today
Today, the focus is on US midterm elections. Republicans are favoured to win control of both House and Senate, although the Senate race remains a close call. If republicans win the Senate by 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.
On data front, we get euro area September retail sales and US NFIB small business optimism index from October. Chinese October PPI is due for release overnight.
ECB’s Nagel and Wunsch are also in the wires, while the Fed’s Barkin is due to discuss inflation overnight.
The 60 second overview
US midterms: Both betting markets and the latest polls suggest that Republicans are the favourites to win control of both Senate and House in the midterm elections today. Senate race will be tighter, however, while betting markets see almost 90% probability of Republicans winning at least the House.. The high inflation has steered both parties away from campaigning for clearly increased spending, and rather the focus has been more on non-economic themes such as abortion rights. As such, we do not expect the election result to be a major market mover in the near term, as the republican congress would most likely be unable to pass dramatic changes to US fiscal policies with Biden still remaining the president. 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 (and inflationary) fiscal policies amid the looming recession. Some are already focusing on the upcoming presidential elections, as Trump stated yesterday that he could announce running in 2024 as early as next week.
Risk sentiment: Equity markets rose yesterday as the outlook for a divided US government and hopes of some easing in Chinese Covid-policies supported risk sentiment. We remain sceptical that a turnaround in the strict zero-Covid stance is coming anytime soon, and continue to think EUR/USD will decline back below parity despite the most recent uptick. The Euro Area November Sentix index released yesterday showed a modest rise in investor confidence both in terms of current situation and future expectations, although from a low level. But with recession risks still looming towards the winter, US CPI likely illustrating another month of fast and broad-based rise in prices later this week and Fed still firmly on the tightening mode, we think the optimism might be too early.
Equities: The bear market rally continued on Monday. Investors bought the dip in growth stocks (tech, communication services) despite higher yields. In the Nordics, industrials continued to rally with Sandvik and SKF +4%. However, real estate the big gainer, up 5% and 25% the last month. We prefer to take risk with yield-sensitive sectors rather than earnings-sensitive sectors to leverage in bear market rallies. S&P500 up 1% and futures somewhat lower today.
FI: Core European rates ended 5bp higher on the day, primarily due to a sell-off in the very late part of day (10y Germany touching 2.34%), coinciding with the announcement of the relatively poor cover in the BoE’s sales operations. Money markets also sold off, adding 3bp to ECB hikes now pointing to a local high of 3.07%. French governor Villeroy said that ECB would hike rates until core inflation had peaked. Spreads tightened, led by the periphery.
FX: Benign risk sentiment in general supported the SEK, but it is also fair to assume that the news of the Swedish Match M&A now being good to go might have helped push SEK crosses lower.
Credit: Credit markets were broadly positive yesterday with iTraxx Main going 2bp tighter to 107.4bp while Xover tightened by 12.9bp to 521.3bp. In addition, the primary markets seem to be wide open this week with several financial and corporate issuers active with new deals across the Eurobond Market. The largest transaction was from Volkswagen International Finance with a 3-part Green Bond of EUR2.5bn, this was well received with strong book interest and final terms notably below indicated initial price talk.
