Futures Levitate On "Republican Rally"; Crude Rout Continues

While hardly a surprise, the spin for the latest round of overnight BOJ USDJPY-buying exuberance, which sent the pair higher by another 100 pips to a fresh 7 year high of 114.500 and just over 500 pips from the Albert Edwards "line in the sand" 120 and pushed US equity futures higher with it, has been the Republican sweep in the midterm elections which not only solidified GOP control of the House but also gave Republicans outright control of the Senate.

As noted before, Republicans took control of the Senate after gaining 7 senate seats and now control both the Senate and the House of Representatives. This result has been well-received by markets, given that it will help open the gateway to reforms that could not previously have been made as analysts suggest that President Obama will now attempt to work with the GOP in the build-up to the 2016 election. Thus global equity futures have surged higher, with the USD-index benefiting and USTs being dragged lower.

The futures extravaganza has taken place even as Brent dropped for the 5th day, falling to $81.63 the lowest since Oct. 2010, with WTI down some 37 cents to $76.81 a level where US shale drillers are no longer profitable [33]...

[34]

... amid growing sentiment OPEC will maintain output target at Nov. 27 meeting even as the oil Basket tumbles past $80.

As a result, European equities trade in the green after opening higher by ~1% following the Republicans winning the Senate & House at the US mid-term elections which has also boost the USD-index which is currently up in excess of 0.5%. More specifically, overall the Republican win has helped equity markets and in company news Marks & Spencer (+8.4%) is the star out performer after their earnings report was not as bad as some had feared. Materials and energy are the weakest sector performers following the losses in precious metals and oil. The strength in equities has subsequently brought a bout of softness to fixed income products, with the Bundesbank’s Bobl auction which drew a higher b/c than previous failing to provide any further price action. Of note, European markets will be looking ahead to more supply due to come from France and Spain tomorrow.

Overnight in Asia markets are trading softer, not helped by a lower services PMI print in China (52.9 versus 53.3 last month). As we type bourses in Hong Kong and China are -0.4%, -0.2% respectively, dragged lower by energy stocks. In Japan the Nikkei has taken something of a breather following the rally since Friday and is currently broadly unchanged whilst the Yen is -0.3% versus the Dollar. Kuroda has made his first public appearance since Friday’s stimulus action and has helped to erase earlier losses in the day with the key takeaways from his speech being his pledge to stamp out the ‘deflationary mindset’ within the nation and that the BoJ stands ready to ease monetary policy again should there be any further risks to the inflation target.

On today's US docket we have ISM non-manufacturing, mortgage applications, ADP employment change, Markit U.S. composite PMI, Markit U.S. services PMI due later.

Bulletin Headline Summary from RanSquawk and Bloomberg

US mid-term elections dictate the state-of-play with markets welcoming the Republican victory with open arms and sending both equities and the USD-index higher.
The stronger USD has subsequently lifted USD/JPY to Dec 2007 highs, while pushing spot gold to its lowest levels since April 2010 and providing further downside for the much beleaguered energy complex.
Looking ahead, attention turns towards ADP employment change due at 1315GMT/0715CST, with US services PMI, ISM non-manf. and DoE inventories to follow thereafter. With Kocherlakota, Lacker and Rosengren all due on the speaker slate.
Treasuries lower as stock-index futures gain following Republican victories in U.S. midterm elections; market focus on ADP report for first look at Oct. employment, ECB tomorrow, payrolls Friday.
Republicans roared back in the midterm elections on Tuesday, capturing control of the Senate from Democrats, winning crucial governor races and solidifying their majority in the U.S. House
GOP won seven seats, with more possible; Alaska still counting votes, Louisiana headed for runoff on Dec. 6. Scott Walker in Wisconsin and Rick Scott in Florida and Bruce Rauner in Illinois prevailed in gubernatorial races; GOP poised to hold sway in 36 statehouses
Republicans capitalized on voter anger over Obama’s handling of the economy; 7 out of ten rated economic conditions poor, preliminary exit polls showed
Republicans will try to force a politically weakened Obama to accept changes to his health-care law, back off on tough environmental rules and nominate judges they endorse.
Pimco had record redemptions from its biggest mutual fund in the first full month after the surprise departure of former manager Bill Gross, with clients pulling $27.5b in October
The ruble weakened to a record as Russia’s central bank moved a step closer to allowing the currency to trade freely in an effort to shake out speculators
Sweden’s central bank is ready to keep its main rate at zero for longer than its latest forecast suggests in an effort to fight deflation
Sovereign yields mixed. Asian stocks mixed, Nikkei +0.4%, Shanghai -0.5%. European stocks, U.S. equity-index futures gain. Brent crude lower, copper declines, gold slides 2.2%

US Event Calendar

7:00am: MBA Mortgage Applications, Oct. 31 (prior -6.6%)
8:15am: ADP Employment Change, Oct., est. 214k (prior 213k)
9:45am: Markit US Services PMI, Oct. final (prior 57.3)
Markit US Composite PMI, Oct. final, est. 58 (prior 57.4)
10:00am: ISM Non-Manufacturing Composite, Oct., est. 58 (prior 58.6)

Central Planners

9:15am: Fed’s Kocherlakota speaks in Virginia, Minn.
9:30am: Fed’s Lacker speaks in Washington
10:00am: Fed’s Rosengren speaks in Lima, Peru
6:45pm Former Fed Chairman Bernanke speaks in Denver
6:50pm: Bank of Japan issues Oct. 6-7 meeting minutes

USD has strengthened as Republicans are seen as more market friendly, although according to some they are perceived to be against the Fed and will try and persuade Yellen to raise rates quicker (needless to say "some" are wrong.) Furthermore, a continuation of weaker oil prices has also weighed on CAD which is at its lowest levels since July 2009 against USD as lower oil prices could pose some threat to Canadian GDP. Additionally, JPY has continued to weaken with USD/JPY at its highest levels since Dec 2007 continuing its trend set on Friday's expansion in QQE and Kuroda overnight saying "there is no limit to future policy options." Well, there is: once the BOJ runs out of securities to monetize it's game over.

Elsewhere, GBP is lower alongside the stronger USD and BRC food inflation at the lowest level since the series began in 2006, with the lacklustre UK services PMI release (56.2 vs. exp. 58.5) placing further misery on GBP as it fell to its lowest level since May 2013. Nonetheless, EUR has been provided some slight support following yesterday’s ECB sources which downplayed any further easing/action due to internal conflicts at the ECB. Also of note is a large USD 4.3bln option expiry at 1.2500 which rolls off today at the NYC cut build (-639k vs. Prev. 3200k). Furthermore, today’s DoE inventories are expected to reveal headline build of 2.35mln bbls and thus present further evidence of the further glut in US supply

Commodities

The USD strength has weighed on commodities with Gold hitting its lowest levels since April 2010 (Gold has now lost USD 80 since the FOMC on the 29th of Oct) and oil is at its lowest levels since October 2011 (also weighed on by a 4 month low in the HSBC China Services PMI and continued reverberations from Saudi's US oil price cut). Subsequently WTI prices have erased yesterday’s gains which occurred following the API crude inventories which showed a drawdown in crude stockpiles against last week’s build (-639k vs. Prev. 3200k). Furthermore, today’s DoE inventories are expected to reveal headline build of 2.35mln bbls and thus present further evidence of the further glut in US supply

Market Wrap

European shares remain higher, close to intraday highs, with the retail and construction sectors outperforming and basic resources, real estate underperforming. U.K. services index falls to 17-month low. Republicans gained control of the U.S. senate. Ruble falls to record as Russia moves closer to free float. Companies including Lafarge, Marks & Spencer, Alstom, ING released results. The Italian and Dutch markets are the best-performing larger bourses, Swedish the worst. The euro is weaker against the dollar. Japanese 10yr bond yields rise; German yields increase. Commodities decline, with silver, gold underperforming and natural gas outperforming. U.S.

S&P 500 futures up 0.4% to 2014.3
Stoxx 600 up 1.1% to 334.5
US 10Yr yield up 2bps to 2.35%
German 10Yr yield up 2bps to 0.82%
MSCI Asia Pacific down 0.8% to 141
Gold spot down 1.9% to $1146.4/oz

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Jim Reid from DB concludes the overnight recap

Yesterday proved to be another tough day for financial markets in Europe. Despite a reasonable start to the day that saw the Stoxx 600 up nearly 0.5%in the first few hours, European stocks ended the day down by more than 1% with both the IBEX and FTSE MIB down by more than 2%. Two events appeared to weigh on equities. Markets turned post the release of the European Commission's (EC) autumn forecasts, where they lowered their projections on euro-area growth and inflation (more on this below), and then gathered further downward momentum following a Reuters article suggesting a divided ECB governing council. The article mentions that a number of ECB governing council members were angered back in September when Draghi effectively set a target for increasing the ECBs balance sheet in the press conference after the governing council explicitly agreed not to make any figure public. It also discusses that 7 and possibly as many as 10 of the 24 council members are against government bond QE. This probably highlights concerns that the ECB may remain behind the curve when it comes to monetary policy action as our economists highlighted in their ECB preview in the latest Focus Europe. The hurdle for the ECB to move to full-blown QE appears to be high. European credit also came under pressure as we saw a near 10bps intraday widening in Crossover following the Reuters article as the index ended the day around 6bps wider. European government bond yields reflected this weaker risk tone as 10 year Bund yields fell more than 4bps to 0.81%, their lowest level in about 3 weeks, while at the same time Italian and Spanish 10 year yields rose around 2bps and 4bps respectively.

In the US equities ended the day on a slightly more positive tone. Having tracked lower with European assets following the Reuters article (the S&P 500 as much as 0.8% lower) we saw a turn in fortunes for US equities after the European close, although the S&P 500 didn't manage to reverse all of the earlier losses ending the day down -0.3%. The Dow Jones did in fact make it back into positive territory ending the day marginally up (+0.1%). The main losers were in the energy sector as yesterday proved to be another difficult session for oil as Saudi Arabia unexpectedly cut its December selling price to US customers. WTI hit an intraday low of $75.48 and although we ended the day comfortably off this low ($77.19) we were still down 2.0% on the day and at the lowest closing level for more than 3 years. Brent saw an even greater decline (-2.3%) to around a 4 year low. This weighed on oil stocks as the S&P 500 energy sector ended the day down -1.9%. As we go to print both WTI and Brent futures have seen further marginal declines to currently stand at $77.14 and $82.48 respectively.

Staying on the US, we also had the trade data print yesterday which showed the deficit widening to $43bn in September, wider than expected ($40.2bn) with the weakness coming primarily from a drop in exports. Elsewhere on the data front factory orders were largely in line (-0.6%) while the ISM New York current business conditions came in below expectations (54.8 vs. 62.0 expected). Meanwhile as we type, the Republicans have gained control of the Senate as expected following victory in Iowa, securing the 6 additional seats needed and meaning Obama will face Republican congress for his last two years. S&P futures are relatively muted following the result.

Looking to the day ahead the main event on the data front will probably be the global services PMIs. In Europe expectations are for a fall in the Spanish number to 55.3 (55.8 previously) while the Italian services PMI is expected to rise to 49.4 (previously 48.8). In the US the non-manufacturing ISM is expected to decline to 58 from 58.6 last month. The other notable data release in the US today will be the ADP employment report, which is expected to come in at +220K. Both US data releases should provide important information on the state of the labour market and the broader economy ahead of Friday's October employment report. Additional data in Europe today includes euro area retail sales number for September. Aside from the data there are also a couple of speeches from Fed officials with Kocherlakota speaking on monetary policy in Minnesota, Lacker speaking on financial stability in Washington and Rosengren speaks at a conference on global banking standards in Lima (Peru).