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I. Market focus
A relative calm prevailed in the foreign exchange markets at the beginning of Tuesday’s session due to the lack of important data and news that could cause strong fluctuations and expectations of the results of the U.S. midterm elections scheduled for today.
The conclusion of the Reserve Bank of Australia’s (RBA) monetary policy meeting was no big news for the markets. The regulator expectedly did not make any changes to the policy stance, leaving its cash rate unchanged at 1.50 percent. The tone of the accompanying statement and comments of the central bank’s governor did not endure the changes either. The RBA’s governor noted a further improvement in the employment situation and economic growth and reiterated his expectations that inflation would rise to the Bank’s target. Overall, there was nothing new.
The results of the U.S. midterm elections will be the main event not only of Tuesday but of the whole week, month and even the year as a whole. The fact is that American voters will go to the polls today with all 435 seats of the House of Representatives up for re-election as well as 35 Senate seats, hundreds of state legislature, local mayoral races, and special ballot provisions. As a result, the distribution of political powers in the U.S. legislature may change significantly. Now the Republican Party has a slim majority in both chambers of the U.S. Congress. If the Democrats regain control of one or both chambers of the Congress, they will be able to block the reforms carried out by the Republicans, as well as launch investigations into Trump's administration and instigate impeachment proceedings. At the same time, if the Democratic Party win a control of Congress, it will not be able to fully implement its policy, since the president has the right of veto, and his term of office expires only in 2020. According to pollsters, the Republican Party will lose the majority at least in the House of Representatives. Consequently, the confrontation between the two political forces in the United States will intensify in the next two years, which will eventually cause at least several government shutdowns.
Among macroeconomic data of Tuesday, attention should be paid to the New Zealand labor market statistics (21:45 GMT).
The stock market participants continue to assess the earnings reports of companies. Today, the focus will be on the results from Eli Lilly and Company (LLY), CVS Health Corporation (CVS), Regeneron Pharmaceuticals, Inc. (REGN) and Archer-Daniels-Midland Company (ADM), set to be published before the market opens.
II. The market highlights are:
The Institute for Supply Management (ISM) reported on Monday its non-manufacturing index (NMI) came in at 60.3 in October, which was 1.3 percentage points lower than the September reading of 61.6 percent. This pointed to continued growth in the non-manufacturing sector at a slower rate. Economists forecast the index to decrease to 59.3 last month. A reading above 50 signals expansion, while a reading below 50 indicates contraction. 17 of the non-manufacturing industries reported growth in October, the ISM said. According to the report, the ISM’s non-manufacturing business activity measure fell to 62.5 percent, 2.7 percentage points lower than the September reading of 65.2 percent. That reflected growth for the 111th consecutive month, at a slower pace in October. The new orders gauge edged down 0.1 percentage points to 61.5 percent last month, while the employment indicator decreased 2.7 percentage points to 59.7 percent and the prices index dropped by 2.5 percentage points to 61.7 percent. Commenting on the data, the Chair of the ISM Non-Manufacturing Business Survey Committee, Anthony Nieves, noted, "The past relationship between the NMI and the overall economy indicates that the NMI for October (60.3 percent) corresponds to a 4.1-percent increase in real gross domestic product (GDP) on an annualized basis.”
The Ministry of Internal Affairs and Communications announced on Monday that the Japanese household spending decreased 1.6 percent y-o-y in September, following a 2.8 percent y-o-y surge in August. Economists had expected household spending to increase 1.6 percent y-o-y in September. Individually, spending reduced for medical care (-7.4 percent y-o-y), housing (-3.3 percent y-o-y), culture & recreation (-3.0 percent y-o-y), education (-2.8 percent y-o-y), food (-1.8 percent y-o-y), furniture & household utensils (-1.1 percent y-o-y), transportation and communication (-0.8 percent y-o-y) and utilities (-0.7 percent y-o-y), but increased for apparel (+0.9 percent y-o-y).
The Reserve Bank of Australia (RBA) expectedly decided to leave the cash rate unchanged at 1.50 percent at its November monetary policy meeting, signaling it continues to wait for signs of an acceleration in wages and inflation. “Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time,” the RBA’s governor Philip Lowe said. At the same time, the Bank raised its forecast for GDP growth and noted that the unemployment rate would fall to a lower level than previously expected. According to the RBA’s updated forecast, Australia’s GDP growth will average 3.5 percent this year and next. The previous projection suggested an increase of 3.25 percent. The regulator also expects that the unemployment rate will drop to 4.75 percent in 2020 from its current level of 5 percent. According to the previous forecast, the unemployment rate should have been at 5 percent by the end of 2020.
III. Market Situation
The currency pair EUR/USD consolidated near the opening level, as investors remained cautious ahead of the midterm elections to the U.S.Congress. It is expected that the Democratic Party will regain control of the House of Representatives after the elections, while the Republican Party will retain a slim majority in the Senate. Experts note that any evidence that the control of the U.S. President Donald Trump over the country will weaken after the elections will be negative for the U.S. currency. Apart from the U.S. midterm elections, the focus of the market participants will also be on the U.S. statistics on job openings and labor turnover (the JOLTs report). According to economists’ forecast, the U.S. job openings decreased to 7.1 million in September from an all-time high of 7.136 million in August. Resistance level - $1.1493 (high of October 23). Support level - $1.1301 (low of October 31).
The currency pair GBP/USD rose slightly, refreshing a two-week high, helped by the stabilization of the U.S. currency and yesterday’s statements by the UK Prime Minister Theresa May’s spokesman that the government continues “to make good progress in the negotiations“ on the Irish border issue. With an empty economic calendar in the UK ahead, traders will also focus today on the dynamics of the U.S. currency and the general market sentiment toward risky assets. Resistance level - $1.3131 (high of October 18). Support level - $1.2951 (low of November 2).
The currency pair AUD/USD traded slightly higher, supported by the outcomes of the RBA meeting, especially the updated forecasts for unemployment, GDP and inflation. As widely expected, the RBA decided to leave its cash rate unchanged at 1.50 percent at its November monetary policy meeting. At the same time, the Bank raised its forecast for GDP growth and noted that the unemployment rate would fall to a lower level than previously expected. According to the RBA’s updated forecast, Australia’s GDP growth will average 3.5 percent this year and next. The previous projection suggested an increase of 3.25 percent. The regulator also expects that the unemployment rate will drop to 4.75 percent in 2020 from its current level of 5 percent. According to the previous forecast, the unemployment rate should have been at 5 percent by the end of 2020. The policymakers also reiterated that as economic growth strengthens and unemployment falls, progress will gradually be made on inflation as well. Resistance level - AUD0.7258 (high of November 2). Support level - AUD0.7182 (low of November 5).
The currency pair USD/JPY rose moderately, refreshing a four-week high, as the demand for the "safe" yen mitigated in response to improved investor risk appetite and raised U.S. government debt yields. Meanwhile, the Japanese data on household spending for September put additional pressure on the yen. The Ministry of Internal Affairs and Communications reported that the Japanese household spending decreased 1.6 percent y-o-y in September, following a 2.8 percent y-o-y surge in August. Economists had expected household spending to increase 1.6 percent y-o-y in September. Resistance level - Y114.09 (high of October 5). Support level - Y112.54 (low of October 2).
U.S. stock indexes closed mixed on Monday. The S&P 500 and the Dow Jones Industrial Average recorded gains, while the Nasdaq fell moderately, dragged down by technology stocks. The focus also was on the ISM Non-Manufacturing Index (NMI) for October. The ISM reported its NMI came in at 60.3 in October, which was 1.3 percentage points lower than the September reading of 61.6 percent. This pointed to continued growth in the non-manufacturing sector at a slower rate. Economists forecast the index to decrease to 59.3 last month. A reading above 50 signals expansion, while a reading below 50 indicates contraction.
Asian stock indexes closed mostly higher on Tuesday, responding to mostly positive signals from Wall Street overnight. However, investors remained cautious, awaiting the outcomes of the U.S. midterm elections. Japan’s Nikkei outperformed, as the yen weakened against the U.S. dollar, supporting the Japanese export-oriented companies.
European stock indexes are expected to trade higher in the morning trading session.
Yields of US 10-year notes hold at 3.21% (+1 basis points)
Yields of German 10-year bonds hold at 0.44% (+1 basis points)
Yields of UK 10-year gilts hold at 1.37% (0 basis points)
Light Sweet Crude Oil (WTI) futures traded lower. Crude oil for delivery in December settled at $62.89 (-0.33%). The crude oil prices fell moderately, despite the re-imposition of the U.S. sanctions on Iran a day earlier, which could cause a reduction in crude supply. Market participants were also preparing for the release of the data on oil inventories in the U.S. Today, the American Petroleum Institute (API) will publish its weekly data on the U.S. crude oil stockpiles. Tomorrow, the focus will be on official report on crude inventories in the U.S. from the U.S. Energy Information Administration (EIA).
Gold traded at $1,230.20 (-0.09%). Gold prices fell slightly, due to the strengthening of the U.S. currency ahead of the midterm elections to the U.S. Congress. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, rose 0.07 percent to 96.35. Since gold prices are tied to the dollar, a stronger dollar makes the precious metal more expensive for holders of foreign currencies.
IV. The most important scheduled events (time GMT 0)
Producer Price Index
ECB's Lautenschläger Speech
JOLTs Job Openings
AiG Performance of Construction Index
|remaining time till the new event being published|
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