Global Daily – Polls have tightened for the midterms

by: Bill Diviney , Aline Schuiling

US Politics: Midterms could be closer than polls suggest – Voting has started across the US for the 2018 midterm elections, and results will trickle in during the early hours of tomorrow morning European time. By 9am CET, we should have a reasonably clear picture of the composition of the new Congress. Based on opinion polling, our base case continues to be that the Democrats win the House, with Republicans retaining the Senate. However, polls have tightened in recent weeks, with the nationwide Democrat lead narrowing to 7.3pts (RealClearPolitics average), down from a peak lead of 9.5pts in early September. This has happened alongside an improvement in President Trump’s approval rating to -9.6pts from -12.9pts in early September. In terms of seat projections, for the House – which is the most likely to change hands – Democrats are expected to take 203 seats, and Republicans 194 seats, with 38 marginal ‘toss-up’ seats. According to FiveThirtyEight, Republicans have just a 1/8 chance of retaining the House. With that said, we saw similar odds given to President Trump’s victory in 2016, and so investors would be wise to prepare for a range of eventualities given the closeness in seat projections. We explore the macro and market implications of the three most likely scenarios in our preview for the 2018 Midterms. (Bill Diviney)

Euro Macro: Ongoing weakness in manufacturing – German factory orders for September confirm that the eurozone manufacturing sector has remained sluggish moving into Q4. Germany’s orders increased by 0.3% mom in September, which was stronger than expected and followed upon a 2.5% mom jump in August. Still, the monthly orders data is very volatile and during the third quarter as a whole, orders declined by 1% qoq, after they fell by 1.6% Q2 and 2.3% in Q1. Compared to a year ago, orders were down by more than 2% in September, which is the lowest since mid-2016. The detailed orders data show that the weakness began in foreign orders from outside the eurozone at the start of the year, but that the declines became wide spread amongst all components during the course of the year. In fact, in Q3, the strongest drops were in capital goods orders from foreign countries within the eurozone (down by almost 6% qoq in Q3), as well as in domestic orders for consumer goods (down by almost 5% qoq). The latter seems due to the distortions in Germany’s car production and demand due to the problems with the new emission testing standards. Although car production should pick up again the coming months, it seems the weakness in eurozone manufacturing is more persistent, and related to weakening global trade growth. This view is underlined by the fact that the new exports orders component of the eurozone manufacturing PMI fell to its lowest level since early 2013 in October. (Aline Schuiling)