Sunrise Market Commentary

Markets

EUR/USD tried, but failed, to conquer the 1.12 mark yesterday. Significantly lower energy prices initially helped the single currency with gas prices falling from €104/MWh to €94 and Brent crude sliding from $118/b to $104/b (including contract-roll). Reports of US President Trump returning to diplomacy instead of military action to end the geopolitical deadlock with Iran triggered the moves. The fact that he later touted the price drop on social media in reference to midterms at least suggests some kind of political motive at play as well to try to turn the tables (see below). Underperformance by Belgian OLOs following collapsed budget talks didn’t spill contagion to other EMU sovereigns. The 10-yr OLO-swapspread rose from 94 bps to 99 bps. The French 10-yr OAT-swapspread narrowed from 153 bps to 150 bps. The dollar found an intraday bid following a stronger October US manufacturing ISM which confirmed both economic momentum and massive price pressures. European equity markets recovered slightly less than 1% with US indices opening strong as well. The latter failed to hold momentum though as AI jitters returned. In an ugly technical move, Nasdaq turned an intraday gain of 1.42% into a 1% loss by the closing bell. Asian risk sentiment and European/US equity futures point to more weakness today. Core bonds tend to profit in bull flattening fashion. The eco calendar contains JOLTS job report and several ECB speakers.

US midterms are up today. Democrats are favoured to take over the House and hope to get the full sweep by flipping the Senate as well. Republicans’ slim majority in the House is highly likely to become a comfortable majority for Democrats. They only need a net gain of three seats. Winning the House allows them to block legislation backed by the US President and install oversight investigations (which ultimately and potentially could end up with impeachment procedures). The path to victory in the Senate is much narrower with Democrats needing a net gain of 4 seats. To do so, they’ll need to take over traditional Republican strongholds like Texas or Alaska. While the outcome of the House race could be clear rather fast, it might take weeks to get final results for the Senate balance. A toss-up state like Alaska might take two weeks to call a winner. If Democrats also get their hands on the Senate, they’ll have veto power over high-level executive and judicial appointments. From a market point of view, a Democratic sweep can help lower US credit risk premia across asset classes.

News & Views

The Reserve Bank of Australia raised the policy rate for a fifth time today, from 4.6% to an 18-yr high of 4.85% in a 6-3 vote. The RBA said inflation remains elevated and broad-based. The outlook has been revised materially higher with risks still pointing to the upside. Inflation is expected at elevated levels through much of next year and would reach the top of the 2-3% band not before 2027Q4, around three quarters later than previously. The upward revision partly reflects higher fuel and other commodity prices. But domestic capacity pressures are also tighter than earlier thought. Many firms are experiencing cost pressures and are either increasing the prices of their goods and services in response or looking to do so, the central bank stated. It noted an increasing risk of higher inflation expectations becoming embedded. The cumulative rate increases have tightened financial conditions and should slow down the (domestic) economy eventually, resulting in a higher than previously projected unemployment rate. The statement no longer features an active tightening bias, prompting kneejerk bull steepening in the Australian yield curve (-0.2 to -6.7 bps) and a lower Australian dollar. AUD/USD loses the 0.7 barrier to trade around 0.698. Money markets bet the hiking cycle has ended but do not discard further tightening completely (40% implied probability by February 2027).

San Francisco Fed research based on historical El Niño episodes indicate that the current one, labeled “very strong”, has driven up PCE by about 0.3 ppts between April and July of this year. This summer effect tends to reverse by the following January. If, however, the current El Niño is followed by a La Niña weather pattern, SF Fed analysis points to further price pressures adding a 1 ppt net increase over the course of 2027. These increases have historically been driven primarily by core services and food prices. The results also imply the potential for higher employment starting in 2027, regardless of an ensuing La Niña event. Researchers say the labor market boost is likely due to factors such as warmer winters in the north.