Rate decisions and German politics join US election as key market focus areas

In focus today

Today, focus will remain on investors digesting the US election result. In addition, German political uncertainty has resurfaced (see below) and we are in for several important monetary policy decisions. We expect Fed to cut rates by 25bp to 4.75%, the BoE to cut by 25bp to 2.75%, the Riksbank to cut by 50bp to 2.75% and Norges Bank to stay on hold at 4.5%. This is in line with market expectations. That said, recent budget uncertainty in the UK leaves the Bank of England communication with the potential to move markets irrespective of the rate decision.

We also get quite a few datapoints around the globe: September retail sales data in the euro area, industrial production data for September in Germany, flash inflation data and budget balance for October in Sweden, wage data for September in Japan overnight and trade data for October in China.

Economic and market news

What happened overnight 

In China, total exports surprised significantly to the topside at 12.7% Y/Y (cons: 5.2% Y/Y, prior: 2.4% Y/Y). Leading up to the election, Chinese factories rushed production as a Trump win became more likely, increasing the threat of a tariffs and ultimately a trade war. At the same time, imports turned negative at -2.3% Y/Y (cons: -1.5% Y/Y, prior: 0.3% Y/Y). Trumps election could, in the short run boost Chinese exports as seen this month, as importers increase their purchases ahead of potential US and EU tariffs. 

What happened yesterday

In the US, Republicans eyed a red sweep as President Donald Trump was re-elected, the Republicans gained control of the Senate, while the battle for the House remained undecided - albeit leaning in favour of the Republicans. Following the outcome of the US election, the dollar index had its biggest gain since September 2022, US yields surged, and US stocks hit record-highs.

If the Democrats take the House - at this point only priced as a 5% likelihood in prediction markets, some market reactions might reverse, particularly in fixed income markets. A Republican majority would likely entail a fiscal priority of increasing the budget deficit and public debt, potentially heightening inflation pressures. In response to these developments, US yields rose, with the 10-year U.S. breakeven inflation rate reaching around 2.40%. This rate is within the Federal Reserve's tolerance level, although further increases might prompt a more hawkish stance.

Looking ahead, market focus is expected to return to economic fundamentals, starting with the FOMC meeting today and the US CPI report due next week. The election outcomes reinforce a bearish outlook for EUR/USD through 2025, driven by stronger U.S. growth dynamics.

In the euro area, the final PMIs for October came in: Composite at 50.0 (cons: 49.7, prior: 49.7), Services at 51.6 (cons: 51.2, prior: 51.2) and Manufacturing at 46.0 (cons: 45.9, prior: 45.9). Additionally in Germany, we receive data on factory orders in September, providing a hint of what the industrial production data will show on Thursday. The final PMIs surprised slightly to the upside, largely due to the growth in services in Italy, France and Germany. The activity in services continues to support growth in the euro area, despite the decline in manufacturing.

The Trump win increases uncertainty of the economic outlook in the euro area, but short-term we do not expect an impact on the economy, while the medium-term effect is negative. The increased uncertainty of the medium-term growth outlook supports our expectations for back-to-back rate cuts by the ECB due to concerns of below-potential growth.

In Germany, the chancellor Olaf Scholz, fired his finance minister, Christian Lindner and called for snap elections in March, throwing the country into political disarray. The firing of Lindner from the liberal party comes after many months of disagreements over the 2025 budget and a longer-term plan to revive the German business model. Increased political uncertainty will not be positive for the already fragile German economy and curt hurt growth through lower investments.

In Sweden, the monthly inflation expectations survey revealed that that lower inflation and lower rates have not yet had a positive impact on consumers and that the hard-beaten construction sector is still deteriorating. While headline PMIs firmed, the services employment index collapsed. Inflation is a tad higher than the Riksbank's forecast, however given the bleaker-than-anticipated recovery the probability of a rate cut today has in our view tilted in favour of 50bp. The rate decision will be published at CET 09:30.

Equities: Global equities were up 1.7% yesterday, driven by the outcome of the US election. Looking at this morning's moves in open cash trades and futures, markets appear to be fluctuating in a normalized fashion. While the outcome of the House cannot yet be definitively called, it seems most likely that we will see a red sweep. On a global scale, the election itself did not have an overwhelming effect on equity returns, considering the huge focus. Beneath the surface, we observed a massive outperformance of US equities and a stronger dollar. As expected, cyclicals outperformed defensives by a substantial margin, with banks performing particularly strongly in the US. The US KBW regional bank index ended 10.7% higher yesterday. European banks underperformed compared to their US counterparts, mainly due to differences in cross-Atlantic yields and changes in the relative monetary policy outlook. Spanish and Portuguese markets were the primary losers, driven by their banking sectors. It is important to note the "Mexican effect", with some of these banks deriving up to 50% of their profits from Mexico.

Small caps benefited yesterday, outperforming large caps by more than 1% on a global level, again led by the US with the Russell 2000 index ending 5.8% higher. The strong performance in small caps may be surprising to many, as small caps generally suffer from higher yields. However, considering the developments leading up to the election, this should not be as surprising. Despite suffering from higher yields, small caps are benefiting from de-regulation and US-first policies. One of the interesting aspects to follow will be the M&A activity across the board, from small to mega-cap deals under the new administration.

The main loser has been utility companies, as they are both related to the green transition and negatively exposed to higher yields. In the US yesterday, the Dow was up by 3.6%, the S&P 500 by 2.5%, Nasdaq by 3.0%, and the Russell 2000 by 5.8%. Asian markets are mixed this morning, reversing some of the differences from yesterday. While the effect of Chinese policy announcements can be hard to separate from the US election effect, we can at least partly conclude that the US election result has not led to investors fleeing away from China. US and European markets are calm this morning with small gains in both markets.

FI: Markets are extending the "Trump trade" with higher yields, higher BEI-rates and a steeper US yield curve driven from the long end. However, the impact on the European yield curves has been somewhat different as short-dated yields declined and the curve steepened from the short end as the market are factoring in more rate cuts in Europe and less rate cuts in the US. However, we still expect that the Federal Reserve will cut rates tonight with 25bp.

FX: EUR/USD dropped by around two full figures, trading in the mid 1.07-1.08 range, as a significant divergence emerged between USD and EUR rates following Trump's win. The USD broadly gained, not only within the G10 space but also against tariff-exposed currencies such as CNH and MXN. USD/JPY rose above the 154-mark. EUR/GBP tracked lower during yesterday's session and ahead of today's expected 25bp rate cut from the BoE. Despite the extended dollar rally, EUR/Scandies kept stable, even closed lower on the day. There could be an initial negative impact on the SEK if the Riksbank opts for a 50bp rate cut today, but upside in EUR/SEK should be limited given that it is broadly anticipated and that our short-term model suggests that the cross is stretched overbought.