Focus on US mid-term elections and US inflation [Video]

(Ipek Ozkardeskaya – Swissquote Bank Ltd)

Week starts with the blurred sentiment on the back of mixed US jobs data and soft Chinese trade figures.

Chinese exports and imports unexpectedly shrank in October; this was the first synchronized drop since May 2020.

US jobs data was mixed and triggered a mixed market reaction, a rally that may not last long into the inflation data.

This week, the US midterm elections & latest CPI update will be the major talking point.

On the corporate calendar, Disney, Occidental Petroleum, and Rivian are among the companies that are due to go to the earnings confessional this week.

Bulls try to retain control

(Neil Wilson – Markets.com)

Tale of the tape: European stocks rallied last week with a strong finish on Friday. US stock markets rose Friday but edged lower over the week, with the Vix also lower. After the Fed raised rates and sounded hawkish, labor market data on Friday painted a mixed picture. Bulls were keen to look at the 3.7% unemployment rate rather than the 261k jobs added for the month. China reopening hopes helped to lift sentiment last week also – a factor to consider after the country said it’s not reviewing its zero covid policy – that news over the weekend saw the dollar gap higher this morning in Asian trade and took the shine off European indices in early trade on Monday, though early losses were swiftly trimmed and we had some green on the boards by 08:30. European stock indices were broadly higher within the first hour of trade and the early gains for the dollar quickly erased as the European session got underway. The bulls are wrestling for control and winning but still a bear market rally.

Reopening in China is still something to keep an eye on; GS was out with a note over the weekend saying Chinese equities could jump 20% on the expected loosening of covid rules in Q1 2023. Data this morning showed that Chinese exports registered their first decline since May 2020.

Apple says it has temporarily reduced iPhone 14 production due to restrictions in China leaving its Zhengzhou factory operating at “significantly reduced capacity”. Meta is reported to begin mass layoffs this week…where Elon leads the rest will follow? Apparently, Musk let go of some people by mistake and is recalling many who were fired by email last week.

Rate uncertainty remains the key to the market. When does the Fed stop and where? The problem as I see it is that the Fed and other central banks are way too complacent in thinking they can get to around 5% or so and then stop. It could take further tightening of monetary policy and further economic pain before inflation is killed off. The bear market still rules until then.

Elsewhere, Ryanair raised its full-year passenger target as it reports strong demand. Full-year profits seen in excess of €1bn. The airline reported a half-year after-tax profit of €1.37bn due to favorable demand and pricing dynamics that saw record Q2 traffic and summer fares which were 14% up on pre-Covid pricing. Shares rose 3% and the read across from Ryanair is helping to lift travel & leisure this morning, with IAG and EasyJet also +1.5%.

Coming up today, ECB President Christine Lagarde speaks, whilst Fed speakers include Susan Collins, Loretta Mester, and Tom Barkin. Eurogroup finance ministers meet, whilst earnings come from Palantir Technologies (PTLR), Viatris (VTRS), and Activision Blizzard (ATVI).

This week is all about the US midterms. Control of Congress as well as key state and local offices are up for grabs. Current polling indicates the Republicans will retake control of the House of Representatives but the Senate is a coin toss. A divided government can be good for the market. A Republican clean sweep would likely take key Democrat legislation off the table (mainly positive for markets), whilst in the unlikely event that the Democrats retain both houses, it could see them push on with fiscal stimulus (mainly negative) since it might be inflationary and push the Fed to do more. Whoever wins, however, markets tend to rally after these elections – in 17 of the 19 midterms since the war, stocks did better in the half-year after than the six months prior.

Read Forex Outlook: EURUSD, USDJPY, NZDJPY, GBPUSD

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