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US election uncertainty, muted start expected for Europe

CMC Markets

Stocks stormed ahead yesterday as traders were gripped by election fever. The race to the White House was basically the only story that mattered and equity markets in Europe and the US powered ahead.

The FTSE 100, the DAX 30 and the CAC 40 rallied by 2.3%, 2.5% and 2.4% respectively. Stocks enjoyed strong gains in the previous two sessions and that helped offset of the losses of last week.

From an economic point of view, things are likely to get worse in Europe over the next few weeks. Stricter restrictions have been introduced in certain parts of Europe, while other regions are getting reading for lockdowns. It would seem that some of the bad news has already been priced in – the large declines that stocks suffered last week was driven the lockdown worries. There is already speculation that some of the tougher restrictions will be extended beyond the initial timeframe. As far as Europe is concerned, we are not going to see any stimulus packages, so the mood will probably be dictated by the health crisis or what is going on in the US with respect to the proposed coronavirus stimulus package.

Even though the political atmosphere was tense, US stocks rallied yesterday. The S&P 500 and the NASDAQ 100 finished up 1.7%.

The bullish sentiment was not just confined to stocks. The risk-on attitude was witnessed across the board as industrial metals such as copper, silver, platinum and palladium racked up strong gains. Like with stocks, it is possible that the metals were recouping some of the ground that they lost last week. Gold’s inverse relationship with the US dollar worked in its favour. The energy market joined in on the bullish move too, and even though WTI and Brent crude pushed higher in the past two sessions, they have only pulled back roughly half of what they lost in the previous week.

Recently, the US dollar has attracted safe haven flows, and conversely, it has come under pressure when traders were keen to take on more risk, and that is exactly what we saw yesterday.  

Overnight election action

The US presidential election is heating up as votes are being counted and it is not looking like there might not be a clear result for days. Biden is leading in the college system but this race is far from over.

The closely watched state of Florida appears to have been taken by Mr Trump – several news outlets have made this projection.

In addition to that, there are reports which suggest that President Trump will take Ohio – the last 14 winners of US presidential elections have won this state.

Fox News, who are big supporters of the US President, has projected that Joe Biden will take the state of Arizona, which would be a big coup for a Democrat.  

President Trump has tweeted that the Democrats are trying to ‘steal’ the election, and this underlines the uncertainty of the situation. 

Going into the election, traders were concerned there would be no clear winner today, and that is what looks like will happen. Political pundits are fixated on Michigan, Pennsylvania and Wisconsin, and we might not know those results for a day or two. North Carolina and Georgia will be of importance too. Georgia is now looking more balanced, and keep in mind it was previously tilting towards Mr Trump.

US index futures traded higher overnight as a Biden win would probably pave the way for a big infrastructure spending scheme. It the last few hours, index futures have retreated from the highs as uncertainty creeps into the mix. It is a similar situation with the US dollar, which has gained ground since yesterday, but has handed back some of the earlier gains.  

It is understood that Democrats have maintained control of the House of Representatives, but that isn’t a surprise. 

Economic announcements

Between 8.15am (UK time) and 9.30am (UK time) the major economies of Europe will post their services PMI reports. Spain, Italy, France, Germany and the UK will publish their readings, and economists are expecting 40.0, 47.0, 46.5, 48.9 and 52.3 respectively.

At 1.15pm (UK time), the US ADP reading will be announced and it is expected to drop from 749,000 to 650,000 in October.

The US services PMI data will be posted at 2.45pm (UK time) and the consensus estimate is 56. Shortly after the announcement, the US ISM non-manufacturing update will be published, and economists are anticipating 57.5.

The Energy Information Administration report is expected to show that oil inventories grew by 1.96 million barrels, while gasoline stockpiles are tipped to tumble by 1.22 million barrels. The figures will be published at 3.30pm (UK time).

EUR/USD – while it holds above 1.1612, it could push higher and 1.1880 might act as resistance. A break through 1.1612 might pave the way for 1.1400 to be tested.    

GBP/USD – yesterday’s candle was very bullish and while it holds above the 100-day moving average at 1.2883, the uptrend should continue. 1.3269 might act as resistance, and a move beyond that mark, could put 1.3515 on the radar. A move through 1.2800, could see it target 1.2675.      

EUR/GBP – while it holds below the 0.9000 mark, it might look to retest the 0.8864 area. A break above 0.9100, could put 0.9157 on the radar.

USD/JPY – last Thursday’s candle has the potential to be a bullish reversal and if it pushes higher it might run into resistance at the 50-day moving average - 105.42 and a move above that, could see it target 107.00. A break below 104.00 could see it target 101.90.                        


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