Post date: 05/11/2018 09:00
Global equities and credit instruments rallied hard last week. The rise in investor sentiment was capped Friday by indications that a trade deal between China and the US was not far off. Currency markets reacted by sending the dollar down against all G10 currencies except the traditional risk havens: the Japanese Yen and the Swiss Franc. Emerging market currencies had a more mixed performance. The drop in oil prices dragged down some oil producer currencies like the Ruble and the Mexican peso, but most Asian currencies posted sharp gains.
The midterm elections in the US on Tuesday loom large for next week. The most likely scenario is the Democrats retaking the House while the GOP retains control of the senate. In the event that the Republicans maintain both chambers, the dollar is likely to rally on expectations of further tax cuts. Could the Democrats capture the senate as well as the house, by contrast, we are likely to see some dollar weakness on the expectation of legislative paralysis and likely congressional investigations on allegations of White House illegalities.
Sterling close one of its best weeks in months on the back of more hawkish than expected Bank of England commentary and rumours of a breakthrough in Brexit negotiations. While the MPC left rates unchanged, as universally expected, it made it clear that it considers the current slowdown temporary. As for Brexit, newspaper reports that the EU was willing to make some concessions allowing for at least temporary UK access to the common market in goods buoyed the pound. No key data releases are scheduled this week so the main risk event for Sterling will be the US midterms and any confirmation or denials of the aforementioned newspaper reports on Brexit.
The Euro ended the week more or less where it started, pulled in opposite directions by weak third-quarter growth data and a rebound in core inflation that matched most expectations. A very quiet calendar this week means that the common currency is likely to trade mostly off news elsewhere, in particular de US midterms.
Some weakish details in the GDP and durable goods report were overshadowed by a quite strong labour market report out of the US. In addition to good news on the headline jobs number and labour force participation, we finally saw hourly wages rising above 3%. This is exactly the kind of report the Federal Reserve wanted to see. Although they will not be hiking rates at their November meeting on Thursday, this data give the FOMC the green light to proceed with gradual rate increases in December and into next year.