Weekly Focus: U.S. Elections and Inflation

The S&P 500 broad market index fell by 3.5% last week after the Federal Reserve (Fed) meeting and Non-Farm payrolls data for October was released. Fed’s Chair Jerome Powell squelched investors’ hopes for a lower trajectory of the interest rates hike cycle. He also said that room for a soft landing for the U.S. economy is narrowing, while rising unemployment to 3.7% in October vs 3.5% in September send a clear but partial message to the crowd that the stock market is likely to continue downwards by the end of 2022.

U.S. Congress elections this week and inflation data will likely provide the second part of the answer as to where markets will finally be headed by the end of this year. These elections are likely to give Republicans control over the House of Representatives, while the scenario for the Senate is not that certain. Investors are betting that republicans will also take over the Senate but Democrats are very close. So, it would be better to wait for the election results for a clear picture to be painted.

The political landscape in the United States is crucial for the global market. If Democrats have full control over both the House and Congress, they could easily raise the U.S. debt ceiling from the current $31.26 trillion to $31.40 trillion or approve bills that are possibly needed to ensure the soft landing of the American economy. However, Republicans are not willing to help Democrats in their quest to get Joe Biden re-elected for a second term as president in 2024. So, Democrats would have to make serious compromises to get any bills they think necessary passed.

Whether investors will price-in all this chaos right after the elections or whether they will prefer to wait is hard to say right now. Technically, stock markets that are looking down may point to a rapid spike and further decline just after the election results are announced. The S&P 500 index moved into a downside formation last week with the target at 3400-3500 points. But there is more of an uncertainty now concerning short-term movements. If Republicans win, we may see the index at 3400-3500 points this week or next week maximum. In case Democrats continue to dominate in Congress, we may expect a slow downside slide of the index or even its reversal to the upside.

The oil market is heavily dependent on geopolitics. The Organisation of the Petroleum Exporting Countries and allies (OPEC+) clash with the United States pushed prices above $90 per barrel of the Brent crude benchmark and they are likely to remain above this level. Any downside movements to the $88-90 level are likely to happen after the elections in the United States on November 8. An aggressive downside scenario with the primary target at $75-85 per barrel may be activated only after the elections. Long-term expectations that suggest Brent crude prices will dive towards $50-65 per barrel are rescheduled to the end of January 2023.

Gold prices are moving within the mid-term downside formation. Prices have already reached primary targets at $1620-1720 per troy ounce. Extreme downside targets are located at $1350-1450 per ounce and are expected to be reached by the end of 2022. But even these downside movements are too uncertain and too risky to open trading operations.

The money market continues to experience elevated volatility. So, it is better to place orders considering longer perspectives and there are two signals that could be considered. The first is the short position for the USDJPY from 148.000-148.500, and the second is the short position for AUDUSD from 0.63700-0.64200. Both perspectives have a significant potential to reach up to 5000 points with a large stop-loss order span although they are risky operations and should be conducted at low volumes. Both trades were opened last week and are still active.