Will the Democrats flip both chambers?

In focus today

 In the US, the midterm elections will be held. Tentative results will be available by Wednesday morning, but final results could take weeks or even longer. Prediction markets and opinion polls favour the democrats to win a safe victory in the House of Representatives, while the Senate race is closer. Prediction markets price in around 76% probability that Democrats will gain enough seats to win a majority in the Senate. On the data front we get the JOLTs report for September.

Danmarks Nationalbank will publish figures for the FX reserve for October. If they show that Danmarks Nationalbank did not intervene, it will be the second consecutive month without intervention. This should further dampen any remaining speculation about an imminent independent rate hike.

Economic and market news

What happened overnight

In Australia, the Reserve Bank of Australia (RBA) raised the cash rate by 25bp to 4.85%, as expected. The narrow 6-3 vote split and removal of the reference to further tightening gave the decision a less hawkish tilt, indicating that the RBA may be close to the end of its tightening cycle.

In commodities, Brent crude declined 7% yesterday to trade below USD 105/bbl, as hopes for a diplomatic resolution to the US-Iran conflict increased. The move followed comments from President Masoud Pezeshkian of Iran that the country's supreme leader had granted the government "certain authorities" in negotiations with the US. However, reports of limited US defensive strikes in the Strait of Hormuz underline that tensions remain elevated, even if the impact on oil prices has been limited. Part of Monday's decline may also have reflected the roll in the main futures contract from December to January delivery.

What happened yesterday

In the US, the ISM manufacturing index increased to 55.5 in October (cons.: 54.5, Sept.: 54.5), above consensus expectations for an unchanged reading. The details point to another month of strong activity in US manufacturing, with new orders edging higher and production increasing notably. Separately, the S&P Global manufacturing PMI was revised lower to 54.9 from 55.9, still indicating strong activity growth, though at a slower pace than the previous month and initially reported.

Also in the US, QRA borrowing estimates contained no surprises for Q4. The borrowing estimate was lowered by USD 10bn due to a slightly higher-than-expected starting cash balance, as expected. The year-end cash balance target was maintained at USD 850bn. Borrowing will rise from USD 618bn in Q4 to USD 800bn in Q1, lifting the end-Q1 cash balance target to USD 1,000bn. This is slightly higher than usual and could contribute to tighter liquidity ahead of the April tax date.

Finally from the US, we also got the Q4 Senior Loan Officer Opinion Survey, which was on the dovish side. Lending standards were little changed, but demand for C&I loans, CRE loans and mortgages all declined. This clearly points to tighter financial conditions having an effect. The Fed already had access to the survey at last week's meeting, which may have contributed to Warsh's more cautious tone.  

In the euro area, the final manufacturing PMI for October came in at 52.7, stronger than the initial estimate of 52.4. Euro area manufacturing PMI's therefore continue to show decent growth momentum despite headwinds from both higher oil prices and rising rates.

In Sweden, PMI's also surprised to the upside with the October manufacturing PMI coming in strong at 60.5 from an upward revised September reading of 58.5 (previously: 58.1), marking the highest level since January 2022. The strong reading was mainly a result of a solid increase in both production and employment.

Equities: November kicked off with an unusually rich set of cross-asset moves. The Stoxx 600 ended around 0.4% higher on Monday, and for much of the session it also looked as though the S&P 500 would finally get some relief after the difficult sessions at the end of last week. But sentiment turned during the day, and the S&P 500 closed 0.5% lower, with the Nasdaq Composite down 1.1%. Once again, the AI unwind set the agenda in the US, with continued selling of tech stocks. IT was the second weakest sector, and semiconductors were among the weakest industries. Only energy fared worse, as oil prices tumbled. The selling has spread to Asia this morning, with the Kospi down almost 4%, and European futures point almost 1% lower following the US session.

FI and FX: Bond markets rallied during yesterday, as hopes for diplomatic efforts between the US and Iran sent Brent crude on a more than 10% decline to below USD 106/bbl. EUR/USD ended back below 1.12 despite initially rallying higher. Energy-exporters NOK and AUD were the weakest G10 currencies of the session while CHF and SEK led the gains. EUR/DKK continued to trade close to the recent low around 7.4735. The US midterms are held today, with tentative results ready Wednesday morning and any preliminary signs of the Democrats winning key swing states in the Senate would likely be positive for broad USD.