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The US will take centre stage this week, as it is US midterms elections time today and the results should be in during the early morning hours Wednesday, suggests the research team at Nordea Markets.

Key Quotes

“Although it is not a done deal, it would be a surprise, if the election doesn’t result in a hung congress. The Democrats are big favourites to win back the majority in the House of Representatives, while it is widely expected that the Republicans will keep the slim Senate majority intact (currently 51 to 49).  Should the Republicans against the odds keep the majority in both chambers, we are ripe for a substantial relief rally in markets.”

“A hung Congress, as is the widely expected result, will put a substantial lid on the prospect of further Trump stimuli.  This is medium-term bad news for the USD and for US equities.”

“On top of the midterm elections, the Fed will meet on Thursday.  No policy action is expected, and the market will therefore be looking for signals on how the Fed chooses to frame the October equity sell-off. We feel certain that the Fed will not consider the October turbulence a big deal.  It’s almost as the Fed has welcomed a less hot trend in the US equity market,  as they have recently been more and more vocal on the risk of financial excesses in the US.”

“Moreover, the Fed may choose to comment on the effective Fed funds rate that is now equal to the IOER rate (the top of the policy rate corridor).  Shrinking excess liquidity in USD has pushed the effective Fed funds rate towards the top of the policy corridor. The Fed may have to address this issue via another 20 bp hike of the IOER rate in December (against a hike of the repo rate of 25 bp).  This topic would, however, more naturally filter into the following meeting minutes rather than making its way to the statement.”

“It’s a light calendar in the Euro area this week, while several key ECB members will get the chance to comment on the recent weakness in the Euro-area key figures. The key architect behind the Euro-area QE programme, Benoit Coeure, will speak publicly twice (Tuesday & Thursday).  Markets will look for clues on the reinvestment policy and the risks surrounding the repayment of TLTRO loans.”