US Midterms Show Surprising Level of Support for Democrats

The US Dollar has seen much better demand over the last 24 hours as the (ongoing) results from the US midterms defied expectations of a “red wave” of republican gains. So far, the democrats have given up just 7 seats compared with the 40 seats lost by Trump in his midterms and the 63 seats lost by Obama during his first midterms in 2010. Biden has praised the success of his party and markets have been buoyed by the strong showing from the democrats.

However, with the GOP on course to win the House and the Senate still a very close call (republican 48 – 46, 51 needed to win), there are still downside risks for USD. Attention today, however, shifts to the October US CPI report where a weaker number will be seen as boosting the chances of a smaller 50bps hike in December and an upside surprise will boost chances of a further 75bps hike.

Key Factors for Today

- USD rallies as democrats defend well during midterms though senate and house might still be lost
- Equities broadly lower amidst USD rebound and crypto liquidation
- FTX on brink of collapse as Binance bails on bailout
- Risk FX weaker today – safe-havens rallying
- Metals hold near highs ahead of US CPI
- Oil prices lower as EIA reports large surplus

Coming Up

- USD – US CPI October
- USD – US Unemployment claims weekly
- CAD – BOC’s Macklem speaks

Stocks Slip Back As USD Rallies – Crypto Contagion Fears

The rebound in the US Dollar yesterday was broadly negative for risk markets. Stock prices in the US, Asia and the UK tumbled as the Dollar traded higher. The sell-off in crypto markets is dampening risk sentiment this week amidst a massive liquidation which has seen bitcoin and other leading crypto assets breaking down to fresh lows on the year. BTC is now down over 70% from last year’s peak. The sell-off has been caused by a mass exodus from struggling crypto exchange FTX. Earlier reports that Binance would acquire the firm have now been reversed, leaving FTX on the brink of insolvency, causing fears of further such events if the company tanks.

DAX Holds Onto Gains

In Europe, though, the DAX clung onto gains and broke out to its highest level since August, now up more than 15% off the 2022 lows. The fall back in European gas prices has been a major boost for stock sentiment in the single market and should help keep prices underpinned if the decline continues.

Stronger USD Hurts High-Beta FX

In FX, the rebound in the US Dollar has seen a reversal of recent themes with risk currencies coming under fire. Weighed on also by the drop in risk assets yesterday, AUD and NZD have been the worst performers today. Ongoing uncertainty around China reopening plans and fears of future lockdowns as part of its zero-covid policy are also creating headwinds for the antipodeans.

Safe-Havens Rallying

Given the drop in risk sentiment, we’ve seen much better demand for safe-havens so far today with both CHF and JPY trading higher. GBP too has been performing well against USD so far today also, though we are keen to point out that is likely not linked to the former health secretary Matt Hancock appearing on “I’m A Celebrity Get Me Out of Here”.

Metals Hold Near Highs, Crude Under Pressure

In the metals and commodities space, both gold and silver have seen a loss of momentum following the breakout rallies we saw earlier in the week. However, with both metals still holding near recent highs, any USD weakness on today’s CPI release should see a fresh move higher for both. Crude prices have turned sharply lower into the back end of the week. Uncertainty around the US midterm elections as well as China reopening and general recessionary fears, are hampering sentiment. Yesterday, the EIA reported a large, unexpected 3.9 million barrel surplus in crude inventories which is adding to bearish sentiment.