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Stock sentiment remains strong, Fed in focus

US and European stock markets enjoyed a positive session yesterday on the back of the midterm elections in the US.

The Democrats took back control of the House of Representatives and the Republicans maintained control of the Senate. Historically, the US stock market has benefited from a divided Congress as investors feel the government finds it difficult to introduce new legislation and the economy ticks along unencumbered.

Last night, US stocks were given an extra lift by President Trump, when he said he hoped to work with Democrats on a number of issues like infrastructure and healthcare. Traders took this as a sign that both sides might be able to have a constructive relationship. Caterpillar, the heavy machinery company, benefitted from the speculation about an infrastructure boost. The tech sector was the standout performer as traders felt that President Trump might not be able to crackdown on the big tech stocks like Amazon. The move higher yesterday on the back of the midterms, was a welcomed addition to the rally that began at the end of last month.

Overnight, China released the latest trade figures and the surplus was $34.01 billion, and consensus was $35 billion, and the September surplus was $31.69 billion. Exports jumped by 15.6%, and traders were expecting 11%.Imports jumped by 21.4%, and economist were anticipating an increase of 14%. Stocks in Asia gained ground on the back of the positive move in the US.

President Trump has been holding a tough line with China in a bid to rebalance the trading relationship, and the latest figures would suggest the trading relationship needs to be rebalanced. That being said, the political dynamic has changed in light of the midterms. The popularity of the Democrats could be a sign that the voters didn’t like Trumps tactics regarding China.  

Sticking with the topic of trade, German and French trade figures will be released at 7am (UK time) and 7.45am (UK time) respectively. The EU is also on Mr Trump’s radar, and he feel the Europeans are taking advantage of the US.  

Earlier in yesterday’s session, oil was pushed higher by the news that Saudi Arabia and Russia are contemplating trimming output in 2019. The energy market turned lower after the Energy Information Administration report showed that US oil inventories increased by more than expected. Adding to that, US oil production reached a new record high.

At 7pm (UK time) the Federal Reserve will announce the latest interest rate decision. No change is expected. There is a high probability of a rate hike in December, and traders will be listening out for any clues as to what the policy in 2019 will look like, the outlook might be a little tempered.    

EUR/USD – has been diving lower since late September and if it holds below the 1.1510/00 region, it could pave the way for the 1.1300 area to be retested. A move to the upside could run into resistance at 1.1584 – the 100-day moving average.

GBP/USD – surged at the end of last week, and if the 1.3000 mark is retaken and held, it could pave the way for 1.3250 to be tested. If the market turns over again, it could target 1.2661. 

EUR/GBP – has been pushing lower since August, and if it holds below the 200-day moving average at 0.8837, it might bring 0.8700 into play. A rally might encounter resistance at 0.9000.

USD/JPY – the upward trend that began in March is still intact, and if the positive move continues it might target 114.73. Support might be found at 111.39. 

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