Markets are treading water ahead of today’s US mid-term elections with volumes well below normal. GBP has shown another modest gain to make it the strongest currency over the past 24 hours on a day where nothing much has happened. US equities and Treasury rates are slightly higher.
It is tempting to sign off there, with not a lot to add today as the markets await the US mid-term elections. Results should start coming through this afternoon NZ time, where it is widely believed that the Republicans will lose the House to the Democrats but retain the Senate. Electionbettingodds.com puts the probability of the former at 70% and the latter at 84%.
A divided political landscape is seen as not a bad outcome. Republicans would lose the ability to push through domestic policy like further tax cuts and changes to healthcare but President Trump would continue to have significant leeway on foreign policy and trade. Historically, US equities have performed well after mid-term elections and the result the market expects would provide some fuel to the incipient recovery in equity markets seen after the recent sharp correction. In the current election cycle Trump remains a wildcard and his behaviour post the elections remains unpredictable.
There hasn’t been much economic news so far this week. German factory orders were stronger than expected in September, showing a monthly increase that has been rare to see so far this year. The Economy Ministry said that the holdup in the auto industry is being slowly resolved, and there are signs manufacturing growth will regain strength in Q4. Final euro-area PMI data came in a little higher than the provisional estimates, still consistent with slower growth momentum.
The latest GDT dairy auction showed a 2% fall in average pricing. Our resident “cow whisperer” Doug Steel called for a modest fall in pricing, so we’ll take that as an in-line result. Whole milk powder prices fell by 2.9%, alongside a fall in most products, with a 1.2% rise in skim milk powder going against the grain.
The NZD sits this morning at 0.6670, about 10pips higher than this time yesterday, and a small fall during local trading hours more than offset by a stronger overnight performance – the same pattern as the previous session. The overnight high was 0.6684.
The AUD is fairly flat as well and is currently 0.7220. The RBA’s policy statement came and went with little market reaction, with the Bank keeping the important final paragraph unchanged. The Bank indicated a small upgrade to its growth and inflation forecasts, with full forecasts published in Friday’s Statement on Monetary Policy. Policy is expected to remain on hold for some time yet, with a bias towards tightening in the distant future.
GBP has been the biggest mover of the day, up 0.4% from this time yesterday to 1.3080. The UK Cabinet met to discuss Brexit, but nothing has yet been agreed and a spokesman for the PM said that there is significant further work to do to resolve the outstanding issues. Still, the market is taking a more positive view on the likely outcome, with both the UK and EU seemingly wanting to wrap up an agreement quickly, perhaps sometime over the next week or two. The Irish border issue remains the sticking point and both parties look to be edging towards a viable solution.
US Treasury yields are slightly higher across the curve in the order of 1-2bps, with the 10-year rate sitting at 3.22%. Clearance of today’s risk event, the mid-term elections, could see a further upside bias, albeit the market is likely to continue to tread carefully ahead of the next FOMC statement on Friday morning NZ time. There was little change in NZ rates yesterday.
Ahead of the US election results streaming in later this afternoon, NZ labour market data today are expected to show the unemployment rate ticking down, with no smoking gun expected in the wage inflation data. Coming one day ahead of the RBNZ’s MPS, market reaction should be fairly well contained. Later today, the market will be interested in how much China’s foreign reserves will drop, an indicator of how much intervention the PBoC did in October.
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