Democratic wave sweeps the midterms

In focus today

In the US, the Treasury releases its quarterly refunding announcement including forward guidance on issuance. The Treasury has maintained its guidance for long-end issuance essentially unchanged for several years, but the wording has shifted in recent quarters. The rise in long-end yields and an upward-sloping curve appear to have prompted discussion of cutting rather than increasing long-end issuance.

Also from the US, ADP private-sector employment growth for October is due. The private sector has added an average of 50k jobs per month since May. The indicator will be the last pure employment gauge before the October jobs report due on Friday. We also get the ISM Services survey.

In the euro area, the flash October inflation data is released. We expect headline inflation rose to 4.0% y/y from 3.8% y/y driven by higher energy prices, while core inflation likely remained unchanged at 2.5% y/y.

We also receive the final services and composite PMI for the euro area for October. We expect a marginal higher final composite reading as the manufacturing data on Monday showed 52.7 compared to 52.4 in the flash release. 

In Sweden, we expect the Riksbank to hike rates to 2.00%, in line with market expectations. This meeting is an interim meeting without any new forecasts, and focus will instead be on forward guidance. We expect guidance to keep the door open for tightening, without signalling for a hike in December, reiterating the previous policy path.

The National Bank of Poland announces its policy rate decision, where we expect rates to remain unchanged at 3.75%.

Economic and market news

What happened overnight

Early US midterm results point to a stronger-than-expected Democratic sweep. Democrats have likely secured the Senate majority with 55 seats, with near-certain flips in swing states such as North Carolina, Ohio and Iowa, while they also won seats in traditionally Republican-leaning states including Texas, Kansas and South Carolina. Democrats are also currently projected to gain a solid majority of the House. Early results suggest a strong performance in gubernatorial races as well, including in Georgia, Texas and possibly Ohio. Importantly, Trump has stated that he will acknowledge the result.

The market reaction has been risk-off, with the move appearing to be driven less by a higher political risk premium and more by renewed concerns around the AI and data centre investment buildout. We do not expect the election result to significantly alter the fiscal policy outlook. US fiscal policy will effectively be locked until the next president, as Republicans cannot pass further deficit-widening reconciliation bills and Trump can veto budget bills from a Democratic-controlled Congress.

What happened yesterday

In commodities, Brent crude has edged back up to around USD 104/bbl this morning after falling below USD 102/bbl. Yesterday, driven by Trump signalling an end to the USD 4bn annual financial support for Israel and stating he is "not looking to kill tons of people". Meanwhile, US officials said strikes on Iran's Qeshm Island had not affected oil flows. However, prices recovered as Iran rejected reports of being close to a deal, with a senior official saying Washington's response to Tehran's conditions "was not convincing".

In the US, the September JOLTS report came in notably stronger than expected. Job openings increased 333k m/m to 7.523mn, well above consensus (7.100mn), while August was revised up as well. The ratio of job openings per unemployed, which historically has tracked wage growth well, ticked higher, reversing the August decline. At the sector level, gains were led by manufacturing and Professional & Business Services, while Leisure & Hospitality and Education & Health Services posted declines.

In Denmark, Danmarks Nationalbank made no FX intervention in October for the second consecutive month.  The upward pressure on EUR/DKK eased during the month, driven by negative EUR sentiment amid concerns over French government debt. The pair fell to as low as 7.4735, down from the August high of around 7.4760 that had prompted FX intervention at the time. Given the recent tailwind to DKK, speculation in a unilateral rate hike in Denmark has calmed.

Equities: Semiconductors staged a brief bounce back on Tuesday. The SOX semiconductor index rose 2.6%, and semiconductors were the best industry in the S&P 500, lifting IT to the top of the US sector table, up 1.3%. The S&P 500 rose 0.4% and the Nasdaq Composite 0.8%, while the Stoxx 600 fell 0.6%. The relief looks somewhat short lived, but it has been a volatile night. As of writing, S&P 500 futures are down 0.6%, European futures about the same, and Nasdaq 100 futures are down 0.7%, well off the lows seen earlier in the night. In Asia, the Kospi is marginally higher after being down 4.0% intraday.

FI and FX: The initial market reaction to the Democratic Sweep in US midterms has been negative. Prediction markets had priced in a Democratic sweep as the most likely outcome ahead of the election day, but the party still outperformed most forecasts. USD has weakened alongside cyclicals AUD and NOK, while JPY and CHF have been the relative winners - a classic risk-off move, rather than purely USD-specific weakening. Similarly, US yields ticked lower across the curve. This morning, the risk-off sentiment is easing slightly with USD regaining a bit of ground and US yields ended the session rebounding slightly.