Caution ahead of midterms and inflation data

A cautious start to trading on Tuesday, with investors seemingly having one eye on midterm results in the US and another on Thursday’s inflation data.

It’s hard to see past both of these things this week. The question for many is whether investors will respond positively to the deadlock in Washington. On the one hand, the prospect of less spending could be viewed as aiding the inflation fight but on the other, the economy could be headed for recession, and inaction in government won’t help the situation.

The Republicans are strongly favoured to take back control of the House and with the Senate currently split, they are likely to edge that as well, meaning Biden’s economic agenda will come to a standstill ahead of the 2024 election.

Arguably the most important takeaway from the midterms will be how Trump-supporting Republicans fare, particularly those so fiercely sticking to the “stolen election” line, among others. With Trump himself due to make a “big announcement” soon, it would appear he’s about to throw his hat into the ring and declare any victories a show of support for his own nomination.

With the US likely heading for recession, whoever wins the Republican race stands a good chance of winning the race in 2024. It may now become a question of how much of a grip Trump still has on the Republican party and whether the manner of his exit will prove to be a barrier or a supportive factor within the base.

Of course, the more pressing issue in the near term is inflation and so, regardless of the midterm results, we may still see some trepidation in the markets ahead of Thursday’s release. The Fed has made clear it intends to slow the pace of tightening in December and this data could either throw that into question or start to build the case for a lower terminal rate than the central bank hinted at last week.

Bitcoin plunges below $20,000

It’s been a rough couple of days for bitcoin which finds itself back below $20,000 and down more than 4% on the day. It has recovered a little after previously being off more than 6% but this is a far more severe decline than we’re seeing in other risk assets which may be a worrying sign for crypto bulls. The declines may be linked to the plunge in FTT which nosedived amid reported concerns over Alameda’s balance sheet. We’ve seen this kind of situation have ripple effects on prices before and this may explain the sharper declines we’re seeing this week.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

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