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Europe Cautiously Higher Whilst US Futures Move Lower Ahead of Mid Term Elections

Uncertainty surrounding the US-Sino trade war, in addition to fears over a faster pace of rate hikes from the Fed, weighed on Wall Street on Friday afternoon.

US Jobs Report Supports Faster Rate of Tightening

The prospect of higher borrowing costs dampening economic growth surfaced once again following a US jobs report that smashed expectations. 250,000 jobs were created in October, significantly higher than the 190,000 forecast. Meanwhile, average earnings grew at the fastest pace since 2009, at 3.1% year on year. With the labour market tightening and earnings increasing, inflationary pressures will be building. This leaves the Fed few options but to continue tightening. Investors will be watching Thursday's FOMC policy announcement closely as speculation heats up, for three more rate rises before mid-2019. It is fair to say that a December rate is as good as given.

Whilst October’s wild volatility is now in the rear-view mirror, traders will be hoping for equity markets to return to a more stable footing over the coming month. However, this could be wishful thinking given the risk events on tap.

The headline risk this week is the US midterm elections, where the Democrats are widely expected to flip the House of Representatives. The resultant political deadlock could weigh on US indices and the dollar alike. This is a huge risk event for the market. We expect to see investors selling out of positions and taking risk off the table ahead of the midterm elections on Tuesday.

The midterm elections will be running to a backdrop of trade war tensions. The Dow put in a late rally on Friday, on hopes of a US-Sino trade deal, closing above session lows. However, optimism of a trade war resolution faded again over the weekend, putting Asian markets on the back foot as trading started for the new week. Europe, however, is moving higher, led by a charge in the Dax, whilst the FTSE is lagging behind on the stronger pound.

Stronger Pound on Brexit Hopes

Brexit optimism combined with suggestions of a faster pace of rate rises in the case of an orderly Brexit sent the pound over 1% higher versus the dollar in the previous week and higher again as trading begins on Monday. Brexit developments and headlines will continue to dominate traders’ minds, although there is nothing major due this week. That said we will need to see some serious progress in negotiations over the coming days if there is going to be an extraordinary EU summit on Brexit in mid-November.

Amid Brexit anxiety, traders will cast a glance towards the U.K. service sector PMI, which will give more of an insight into the health of the economy and growth momentum at the beginning of Q4. Expectations are for activity in the service sector to dip in October to 53.3, down from 53.9 in the previous month. A larger than forecast fall could see the pound give back its early gains this morning.


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