Dollar and US Yields Soften After Midterm Elections

  • The big story is the US midterm elections
  • The current US fiscal stance and macro outlook remain intact and the Fed will feel comfortable tightening rates further
  • While the knee-jerk reaction today is to push US yields down and sell the dollar, we think the previous drivers will re-assert themselves
  • RBNZ decision will come in the North American afternoon
  • EM FX is rallying as the dollar comes under broad-based pressure; Poland is expected to keep rates steady at 1.5%

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From the Securities Lending Trading Desk

In the US, Redfin’s stock price has been declining in spurts over the past year as the share price is now half of what it was at the start of 2018. The auto sector is facing its first decline in more than two decades on a slowdown in the Chinese economy and as the effects of the trade war are now starting to take effect. In Europe, Aryzta, a popular lending name, had its shares suspended this week following a vote on a rights offering to ensure the bakery’s survival.

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Dollar Firm, Markets Calm Ahead of US Midterm Elections

  • Markets await the results of today’s US midterm elections
  • US rates are struggling to maintain upward momentum
  • Italian Finance Minister Tria refuted press reports that he was going to present a revised draft budget to the EU
  • Eurozone reported final services and composite PMI readings for October
  • RBA left policy unchanged last night, as expected
  • Philippines October CPI remained steady at 6.7%y/y; Brazil COPOM released its minutes

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Thoughts on the US Elections and Economic Outlook

The mid-term elections in the US are widely regarded as a referendum on President Trump’s first two years in office. While markets have largely priced in a benign outcome, we outline below the tail risks and what they mean for the US economy and global financial markets.

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Drivers for the Week Ahead

  • The US mid-term elections will be held Tuesday
  • The two-day FOMC meeting ends with a decision Thursday
  • The US 10-year yield rose to trade near 3.22% Friday
  • China continues its data deluge; President Xi appears to be taking a hardline approach
  • RBA meets Tuesday and RBNZ meets Thursday; neither are expected to move on rates
  • EM FX got some traction last week as the dollar rally stalled but has come under pressure again this week

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EM Preview for the Week Ahead

EM FX got some traction last week as the dollar rally stalled. Still, event risk remains high in many EM countries, notably Brazil, Mexico, South Africa, and Turkey. The FOMC meeting this week is widely expected to see no actions, but the Fed should signal that a December hike is on track. As it is, US yields are marching higher again. We believe the global backdrop for EM remains negative.

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What Has Changed in EM

  • US-China relations may be thawing
  • Malaysia fiscal policy is deteriorating
  • Turkey central bank revised its inflation forecasts up sharply
  • Political risk remains high in South Africa
  • A congressional ally of Brazil President-Elect Bolsonaro downplayed the chance of passing pension reforms anytime soon
  • The Mexico City airport fiasco has dented market sentiment
  • Fitch cut the outlook on Mexico’s BBB+ rating from stable to negative

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Equity Rally Extends on China Optimism, Dollar Correction Continues

  • Optimism over US-China trade tensions is the latest driver for improved market sentiment
  • October US jobs report will be the data highlight
  • Canada also reports October jobs data
  • Final eurozone PMIs were reported
  • Australia reported September retail sales
  • MSCI EM has staged an impressive comeback, rallying nearly 8% from the October 30 low

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