RECAP

Markets during the European session initially seemed resigned to light volumes and tight ranges ahead of the U.S. midterm elections. The mixed PMIs failed to deliver a fresh steer to price action, as German labor costs, through October, reinforced the notion that underlying inflation is still firming in the eurozone.

Bunds ground higher, eventually breaching yesterday’s best levels to test the 160-level. BTPs reversed their early gains clouding the recent open interest picture. While the Bund/BTP spread widened 8bp as Italian officials held their ground but signaled a willingness for “constructive dialogue.”

European Stoxx and DAX erased early gains to shed 0.5%, with retailers and telecoms are the weakest sector.

The Bloomberg dollar index oscillated around the 1,200. The AUD and NZD were the outperformers in the Group-of-10, while the CAD was cast as the laggard when the USD/CAD breached Friday’s highs. The Cable suffered from no-deal Brexit tweets ahead of the cabinet meeting today.

The WTI crude traded sideways around $62.80, with base metals marginally higher.

In the key headlines for the European session:

  • EU to offer border compromise in the Brexit boost for May: Times
  • EU’s Moscovici expects a “strong, precise” answer from Italy on Nov. 13
  • Italy Finance Minister Tria says Italy still has some disagreements with European Countries; can still have constructive dialogue
  • Eurozone final Oct. Serv PMI 53.7 vs 53.3 flash; Italy Oct. Serv PMI 49.2 vs 52.0 est.
  • China still ready to talk trade with Trump, but will not be “bullied or oppressed,” Vice President Wang Qishan says
  • China Prem Li says there is downward pressure on China’s growth but has ample tools to deal with difficulties; will not resort to competitive devaluation
  • PBOC’s Ma says yuan hitting 7 to the dollar “isn’t that crucial”

OUTLOOK

The American session will focus on one thing and one thing only and that would be the U.S. Congressional elections that seem to have taken over the investors mindset and the expectations of what might happen. So far, there are three available scenarios that investors are looking into.

The first and base scenario includes the Republicans relinquishing their hold on the House of Representatives for the Democrats and maintaining their hold on the Senate. This would not have that big of an effect on the market as investors are already expecting that outcome. However, should the Republicans maintain a hold on both aspects of Congress, markets are going to be more on the positive side than if the Democrats manage to take both houses.

The U.S. will also be selling the 4-, 8-, and 52-week bills and 10-year notes. While the Economic Calendar will focus on the JOLTS Job Openings which show how much new jobs are being offered in the U.S. as of the end of last month.

TRADERS VIEW

Political risks dominated the currency market, with the dollar confined to narrow ranges before the U.S. midterm elections, while the pound erased gains before another key Brexit meeting for Theresa May’s administration. The euro hovered around the $1.14 handle as German macro data lent support. Treasuries were little changed in rather thin trading volumes before a 10-year note auction. Emerging-market currencies consolidated, while European stocks edged lower, together with U.S. futures.

EUR/USD – Enters bar 7 on monthly DeMark buy setup and 6 on the weekly to suggest fresh lows cannot be excluded as downside risks still prevail in the medium term; 21-DMA caps, for now, fading interest looks strong as price action develops below the cloud.

GBP/USD – Short-term picture looks supportive for longs as bullish harami completed on the weekly; Bloomberg Trender Indicator shows bears remain in control on closes below 1.3248; strong resistance at 1.3257, the 21-MMA.

USD/JPY – Retains bullish bias; to complete DeMark sell countdown Tuesday and risk correction.

AUD/USD – Consecutive closes above 55-DMA suggest a short-term bottom in place.

EUR/CHF – Escapes gravity from short-term MAs, slight bullish bias