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US Markets Respond Favorably to Republican Senate Victories


Today's financial recap and tomorrow's financial outlook.

The markets viewed the results of the mid-term Congressional elections as favorable for risk assets. In the Senate, Republicans gained a net nine seats an upside surprise because participants had expected a gain of at least six seats. They also maintained their majority in the House. Speeches today from expected Senate Majority Leader McConnell and President Obama appeared very conciliatory and suggested they were open to making changes to existing programs. Investor sentiment still leaned more towards a "show me" attitude.

The US dollar was higher in anticipation of the Keystone XL pipeline construction continuing that would require less petroleum imports in the future.

The Ruble basket fell by 2.70% - about a five standard deviation move - and was the weakest performing asset on a risk-adjusted basis. This morning the Russian central bank announced that it is considering using gold to pay for imports, further interest rate increases, new FX repo contracts, and additional interventions in the currency markets. It is also announced that it was only "several steps" away from letting the ruble free float, a widely expected move by the market. These announcements did little to stem the losses, however.

Crude oil managed to rebound today despite the strength in the US dollar. A pipeline explosion in Saudi Arabia that is suspected of being a terrorist attack initially sent the price up by about 1.5%, but those gains were given back in a short time. However, the price continued to build higher throughout the session and recouped much of the prior day's losses. West-Texas intermediate crude oil rose 2.03%  to 78.76.

US equities were higher for most of the day due to the elections, but the pipeline scare in the middle of the day caused a modest selloff. The S&P 500 (SPX) gained 0.57% largely due to gains in utilities, energy, and materials stocks. Health care was the weakest performing sector today as providers bore the brunt of the selling on the expectation that parts of the Affordable Care Act (ACA) would be repealed, which has been a boost for their business. Conversely, both small caps and tech stocks lagged the S&P.

Tomorrow's Financial Outlook

The main event tomorrow is the ECB rate decision, scheduled for 7:45am ET with President Draghi's press conference 45 minutes later. Professional forecasters have put about a 35% probability that the central bank will follow up the Bank of Japan last week and expand its asset purchase program at tomorrow's meeting, but in this author's opinion I think that it the possibility is much lower than that. The ECB has repeatedly said that they would much rather see fiscal policymakers attempt to initiate reforms before they take the eventual step into larger asset purchases.

In the US, economic reports include third quarter labor market costs and weekly jobless claims. Two regional Fed Presidents, Evans and Mester, are scheduled to give speeches. Overnight, Australian employment, German factory orders, and UK manufacturing production are all scheduled to be released.

Fifty one major US companies are scheduled to report earnings tomorrow. Notables include Kate Spade (KATE), Wendy's (WEN), Advance Auto Parts (AAP), Apache (APA), Walt Disney (DIS), Nvidia (NVDA), Lions Gate (LGF), Kodiak Oil & Gas (KOG), Medivation (MDVN), First Solar (FSLR), Zynga (ZNGA), DirecTV (DTV), and AOL (AOL).

Twitter: @Minyanville

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No positions in stocks mentioned.

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