It’s Monday morning and European financial markets have decided to step carefully into this new week of political uncertainty. U.S. elections for the White House are tomorrow. On Thursday, China’s ruling party begins the 18th congress in its history. It’s unprecedented that the world’s dominant superpowers are choosing their leaders at the same time. However, expect a near broke, Euro periphery economy like Greece, to have the greatest impact on financial markets in the short term.
Greece again has to vote on whether to accept labor reforms and further austerity measures before its other euro members decide to free up another tranche of much needed financial aid. Not helping, investors continue to wait for Spain to officially ask for a bailout from its European partners, which would could kick-start the ECB’s bond buying program. Economic fears for the country have compounded by this morning’s +2.7% rise in the country’s unemployment claims for October. This has pushed Government bond yields higher this morning. Both the U.S. the Chinese elections are expected to deliver “clarity,’ despite the Greek vote expecting to pass, uncertainty remains high.
Growth in the U.K.’s dominant service sector slowed last month (50.6 vs. 52), as fewer new orders and another month of firings continues to weigh on business activity. Coupled with a fall in recent manufacturing is further proof that economic activity in the U.K. will not repeat the Q3 surge reported last month. The reports suggest that the U.K. economy is still too fragile to believe that the worst has passed. Growth risks remain to the downside and despite reporting flattish or modest growth for the past 24-months, the longer this scenario continues the tougher it is for Cameron’s government to kick-start an ailing economy. This certainly ups the chances of further QE being delivered at next week's BoE meeting. Currently, sterling is taking the brunt of it outright and on the crosses this morning.
Today’s U.S. non-manufacturing PMI is being delivered between the granddaddy of U.S. economic releases, NFP and U.S. election. It will be surprising to see market participants pay much heed to this economic release. Investor consensus is looking for a small moderation in the headline to 54.5 after it rose to 55.1 in October. If the headline beats expectations, just more proof to add to the other recent reports suggesting that that the worst of the year’s slowdown scare could be very much behind us. This should benefit the risk play; the dollar against yen and despite the Greek vote, the European currencies should get a lift.
Tomorrow, the U.S. populace goes to the polls to elect their president, all members of the House of Representatives, and about a 1/3rd of the 100 members Senate. Predictions see a status quo result as most likely, with President Obama re-elected, the House staying under Republican control, and the Democrats maintaining a simple majority in the Senate. However, two other scenarios could occur. Mitt Romney as the new president and he will be with or without the control of the Senate.
Expect a Romney win to influence the markets along three themes a) Regulatory (a possible win bringing forth some regulatory relief; a plus for stocks, business confidence and risk.) B) Monetary perspective (a win would give us a new Fed head in two-years. What will that do to current bond yields? It can only push them higher.) c) And the Fiscal Cliff (Mitt winning would certainly address the G20 Fiscal Cliff concerns in a different light. In this winning scenario playing field, the "big dollar" will look to outperform the EUR and JPY and negative against risk sensitive currencies.) Make it easy; do not look beyond the three above themes for market guidance. Too much noise only complicates trading decisions even further!
Current daily momentum is leaning towards more losses for the single unit in the coming sessions. The Bulls have become Bears and are short after losing for being long the EUR for most of last week. The market has now broken below the 200-DMA (1.2830) targeting 1.2740-50 level. There is a rumor of a +7m EUR option payout at 1.2775 expiring tomorrow; an area too close to defend and too expensive. The market continue to prefer to be a better sell of EUR’s on rallies