Ahead of the most important day for US politics in years, global markets have hunkered down, coiling in anticipation or dipping cautiously into the red, as traders braced for midterm elections in the United States while anticipating a “shock outcome” with 2016 still fresh in everyone’s head.

European markets turned lower alongside American futures while Asian shares were fractionally in the green. The pound fluctuated amid Brexit hopes and despair, while Treasury yields dipped and the dollar rose.

Asian trading started off well thanks to the momentum from Monday’s strong US session (excluding Apple) with MSCI’s index of Asia-Pacific shares ex-Japan rising 0.4%. Japan and Hong Kong helped Asia overcome another Chinese wobble, where the Shanghai initially slumped but managed to recover most losses, although Europe slipped into the red early on as investors punished several corporate earnings misses and pre-U.S. midterms nerves took hold.

Apple suppliers such as Taiwan’s Hon Hai Precision Industry were hit by a report that Apple had told its smartphone assemblers to halt plans for additional production lines dedicated to the iPhone XR. The report had also driven Apple shares 2.8% lower in U.S. trade.

Europe’s Stoxx Europe 600 lost traction after a positive start and technology, retail and automakers were among the sectors dragging the index lower. That said, nobody was making any big statements and volumes were more than a third below the 30-day average. “European stock markets are a little in the red as political uncertainty hangs over investor sentiment,” CMC Market analyst David Madden wrote pointing to tensions between Italy and the EU over the country’s budget, China-U.S. trade spat.

S&P futures were rangebound, drifting in a 15 point range from session highs shortly before the European open to session lows as US traders walked in.

For once traders will forget interest rates, earnings and trade war, and will focus entirely on the looming US midterm elections which are seen as the first major referendum on the policies of President Donald Trump, including his sweeping tax cuts and hostile trade policies. Polls point to his Republican party losing control of the House of Representatives which could curb some of his policymaking power. The GOP is expected to retain control of the Senate.  Meanwhile, investors have one eye on the U.K., where Theresa May is redoubling efforts to reach a Brexit deal.

For today’s session, it will be all about polling and the results to come over the next 24 hours, so be on the look out for headline risks as exit poll results start to trickle in later in the day. Polls over in the East Coast are now open and that will be followed by the rest of the states in the coming hours.

Having been burned by the outcome of the 2016 presidential election, traders are especially wary: “It is definitely not the time to buy the dip,” said London & Capital’s CIO Pau Morilla-Giner. “Everything that could go well for U.S. consumers in the last couple of years has gone well, but now the tide is turning… At the moment you are running out of drivers of growth in the U.S.”

But while volumes were muted, nerves were distinctly absent from market indicators: the Cboe Skew index – also known as the “black swan” index – hovered near its 2.5 year low hit on Friday, indicating demand for OTM options remains tepid.

“Unlike the U.S. Presidential election or the U.K.’s Brexit referendum, the upcoming U.S. (midterm) elections are not a binary event,” said Yasuo Sakuma, chief investment officer at Libra Investments. “So it’s unlikely to send stocks significantly in one direction, apart from initial quick reactions.”

Back to markets, Italian and Spanish stocks weakened as updated PMI figures confirmed euro zone business growth fell to a two-year low last month due to rising trade tensions. The future output index caused even more concern as it fell to a near four-year low of 60.5 from 62.1.

“Euro zone companies reported a disappointing start to the fourth quarter,” said Chris Williamson, chief business economist at IHS Markit which compiles the data.

Most European government bonds were mixed and range-bound, with Bunds grinding higher, eventually breaching yesterday’s best levels to test 160. In Italy, BTPs reversed early gains after eurozone finance ministers called on Rome to change its budget at a meeting on Monday. The Bund/BTP sprad widened 8bp as Italian officials hold their ground but signal an willingness for “constructive dialogue.”

Political risks also dominated the currency market, with the Bloomberg dollar index confined to 1 point of 1,200 while the pound erased gains before another key Brexit meeting for Theresa May’s administration. The euro hovered around the $1.14 handle as German macro data lent support. Treasuries were little changed in rather thin trading volumes before a 10-year note auction.

The Aussie led gains among G-10 peers in delayed response to RBA’s painting of a slightly more upbeat picture of the economy in the statement accompanying its decision to leave rates unchanged Tuesday. The yen was little changed after earlier falling to its weakest level in a month as advancing Japanese stocks damped demand for haven assets. Emerging-market currencies consolidated.

Gold was little changed but in oil markets crude prices were near multi-month lows after the United States allowed eight countries to continue buying oil from Iran temporarily, easing the likelihood of a sharp supply drop. U.S. West Texas Intermediate crude futures slipped 0.3% to $62.89 a barrel, after hitting a seven-month low of $62.52 on Monday.

Elsewhere, a flurry of earnings are expected, including from Lilly and Ralph Lauren.

US Event Calendar

• S&P 500 futures down 0.2% to 2,735.50
• STOXX Europe 600 down 0.1% to 363.10
• MXAP up 0.8% to 152.88
• MXAPJ up 0.5% to 487.96
• Nikkei up 1.1% to 22,147.75
• Topix up 1.2% to 1,659.35
• Hang Seng Index up 0.7% to 26,120.96
• Shanghai Composite down 0.2% to 2,659.36
• Sensex up 0.2% to 35,025.03
• Australia S&P/ASX 200 up 1% to 5,875.18
• Kospi up 0.6% to 2,089.62
• German 10Y yield fell 0.2 bps to 0.424%
• Euro up 0.07% to $1.1415
• Brent Futures down 0.3% to $72.93/bbl
• Italian 10Y yield rose 0.5 bps to 2.956%
• Spanish 10Y yield rose 1.2 bps to 1.578%
• Gold spot up 0.3% to $1,234.90
• U.S. Dollar Index up 0.01% to 96.29

Top Overnight News from Bloomberg

• U.K. Cabinet ministers expect to be locked in a room to study the latest options for a Brexit deal in strict secrecy on Tuesday as Theresa May redoubles efforts to get a deal this month, according to people familiar with the matter
• German Chancellor Angela Merkel took aim at populist rhetoric that portrays the media as enemies, saying it’s unacceptable to attack critical journalism in a democracy
• China’s vice president said Beijing remained ready to discuss a trade solution with the U.S., and urged changes in global governance to address a surge in populism and rapid technological advances
• President Donald Trump said he is “probably not” meeting Vladimir Putin in Paris this weekend but does expect to meet the Russian president at a summit in Argentina at the end of November
• U.S. gave a stark warning to companies around the world: Evading sanctions on Iran will hurt
• German factory orders unexpectedly rose for a second month in September in a sign that Europe’s largest economy is poised to regain growth momentum toward the end of the year; orders gained 0.3% from the previous month, compared with economists’ predictions for a 0.5% decline
• Italy signaled it’s not ready to budge on its controversial budget even as euro-area finance ministers called on it to prepare revised spending plans that comply with the bloc’s rules, in a sign that the standoff between Brussels and Rome is set to escalate in the coming weeks
• Mitsubishi UFJ Kokusai Asset Management Co. has been piling into Treasuries on expectations that the U.S. yield curve will flatten as the economy gradually slows. It has done so by selling bonds in euro-zone nations, with the exception of Spain

Asian equity markets were mixed as weakness in China clouded over the mostly positive lead from US where the DJIA and S&P 500 closed higher with the latter led by strength in energy names, although the Nasdaq declined amid continued Apple woes after reports the tech giant cancelled a production boost for the budget iPhone XR due to slowing demand. ASX 200 (+1.0%) and Nikkei 225 (+1.1%) traded higher with Australia led also by the energy sector leading as it mirrored the outperformance seen stateside, while the Japanese benchmark benefitted from recent currency weakness and rose back above the 22000 level. Elsewhere, Hang Seng (+0.7%) and Shanghai Comp. (-0.2%) were subdued amid ongoing trade uncertainty and after the PBoC skipped open market operations again, while notable weakness was seen in casino stocks which pulled back from recent gains. Finally, 10yr JGBs were lacklustre after weakness seen in T-notes and with demand subdued by the strength in Japanese stocks.

Top Asian News

• PBOC Adviser: Capital Outflow Pressure Smaller Than 2 Years Ago
• Goldman Names Binnion, Wang as Asia ex-Japan ECM Co-heads: Memo
• Camera Maker Mulls Taking a Note From Taylor Swift on Trade War
• Malaysia Probes More Deals by Ex-Goldman Partner Leissner

Major European indices are mostly in the red (Eurostoxx 50 -0.5%) with underperformance in Spain’s IBEX as the index is dragged lower by heavyweight financial and telecom names. Meanwhile the SMI (Unch) outperforms with the index lifted by Adecco (+3.7%) post-earnings. In terms of sectors, industrials are benefitting from the lower base metal prices, while telecom names lag.  Moving onto individual equities, Zalando (-6.0%) is the worst performing stock following their earnings, with Morrisons (-5.0%) also lower on the back of their number. IWG (+7.0%) are out in front following optimistic earnings and conformation of their guidance, while FTSE heavyweight Associated British Food (+2.5%) in the green after the company said they expect an increase in retail profit after reporting their earnings.

Top European News

• German Factory Orders Unexpectedly Rise as Domestic Demand Gains
• Rosneft Uses Record Cash Flow to Pay Off Debt in Volatile Market
• Tria Says Italy Still Has Disagreements With the Commission
• Brexit Endgame Lifts Pound’s Volatility as Euro Stays Subdued
• France Flexible on Date of Digital Tax Implementation: Le Maire

In FX, it is a different day, but familiar feel or trend in G10 land, as Sterling rivals the Antipodean Dollars for major honours. Cable continues ride high on a wave of Brexit deal optimism amidst more reports of an EU offer on the Irish border, and the latest proposal under the guise of an ‘Independent Mechanism’ that would allow the UK options to terminate the temporary customs arrangement. Cable has extended gains to test and briefly eclipse resistance around 1.3080, while Eur/Gbp has slipped further below 0.8750 to just a handful of pips from reported stops at 0.8720 and Gbp/Jpy breached its 200 DMA and 148.00 before losing some momentum. Meanwhile, the Aud has been boosted by relatively upbeat RBA commentary overnight following its monetary policy meeting with 2018 and 2019 growth seen stronger than previously and a tighter labour market expected to lift wages. Hence, Aud/Usd appears firmer above the 0.7200 handle that has been tough to overcome, and eyeing 0.7250 next, while Aud/Nzd has bounced from near 1.0800 to touch 1.0850, as Nzd/Usd remains capped ahead of 0.6700. EUR/CHF/JPY/CAD – All narrowly mixed vs the Greenback, which is trading cautiously ahead of today’s US mid-term elections, with the DXY hovering just above 96.200, as the single currency runs into offers around 1.1425 and ongoing Italian-EU budget issues that are preventing a more concerted attempt on technical resistance around 1.1456-60. Meanwhile, the traditional currency safe-havens, Chf and Jpy remain rangebound between 1.0055-35 and 113.20-45 with the latter looking at a key Fib (circa 113.34) on a closing basis for technical direction. Elsewhere, the Loonie has lost some of its BoC impetus as oil prices sag again, but could derive more independent pointers from Canadian building permits later. Usd/Cad now back above 1.3100 and climbing. EM – Some loss of momentum after Monday’s broad outperformance vs the Usd, but the Try did derive more support earlier to trade within a whisker of 5.3000 on hawkish rhetoric from the CBRT that sounded confident about hitting its inflation target via tight monetary policy, even though Turkish CPI accelerated further above in October.

In commodities, WTI (-0.4%) and Brent (-0.5%) are both lower as details of the US waivers on Iranian oil emerge. So far, China is allowed to buy around 360K BPD of Iranian oil for 180 days, with source reports noting that conditions require the disclosures of counter-parties and settlement methods. Elsewhere, India is allowed to purchase of up 300k BPD of oil, while South Korea was granted a 200k BPD oil waiver. Additionally, comments from US President Trump that he wants to impose the sanctions gradually to prevent shocks to the market, may have contributed to the price decrease. Traders will be eyeing the weekly API crude inventories released later today as a fresh catalyst for prices. Gold (+0.2%) has been gradually rising throughout the session as the yellow metal detaches itself from USD influence to act as a safe haven, meanwhile copper is lower and moving in tandem to the risk tone. Separately, aluminium associations from the US, Canada and Mexico have urged their governments to agree a deal which eliminates US aluminium tariffs from Canada and Mexico without the imposition of import quotas.

US Event Calendar

• 10am: JOLTS Job Openings, est. 7,085, prior 7,136

DB’s Jim Reid concludes the overnight wrap

The main focus today will of course centre on the US midterm elections. According to the betting website predictit.org, the base case of the Democrats taking the House but the Republicans retaining the Senate is around 60% likely. The odds that the Republicans hold both chambers is around 30%, and the odds that the Democrats take both chambers is around 10%. We should  know tonight, with the first polls closing at 6pm EST/11pm GMT, though the first major bellwether states to close will be Virginia and Florida at 7pm EST/midnight GMT. The former has some marginal House races in the outskirts of Washington, DC, while the latter has a close Senate race. As the night progresses, we could know the final results by 10pm EST/3am GMT when the last marginal Senate races finish and enough House races are in the books that we should have a firm idea.

If things are still close, it could come down to California and its seven competitive House races, which could, in a worst-case scenario, take days or weeks to finalize as mail-in ballots are counted.

Ahead of the US going to the polls, the most impressive part of the last 24 hours was how well the S&P 500 held up given the renewed weakness in tech. Whilst the S&P closed +0.56%, the NYSE FANG index was down -1.35 % (but off intraday lows of -2.77%). The NASDAQ also fell -0.38% with Apple at that forefront following a drop of -2.84% (-9.28% over 2 days and -13.13% from peak on October 3) after Japan’s Nikkei media outlet reported that the tech behemoth had told assemblers to halt new production capacity of the new iPhone XR until there is more assurance on demand. That move for the NASDAQ was the first move of less than +/-1% since October 23rd (eight business days) and breaks the longest such stretch since December 2008. That came after the STOXX 600 had closed -0.16% in Europe following an intraday range of just 0.53% which was the smallest since the end of September.

This morning in Asia, markets are largely flat to down with the exception of Japan. The Shanghai Comp (-1.05%) and Hang Seng (-0.23%) are lower while the Kospi (+0.02%) is flat and the Nikkei (+1.14%) is up. Elsewhere, futures on the S&P 500 (-0.05%) are flat. In overnight news, the US and China are set to hold diplomatic and security talks in Washington this coming Friday, ahead of the upcoming meeting between their respective presidents on the side lines of the G20 meeting. Elsewhere, the PBoC’s adviser Jun Ma has said that the Chinese yuan hitting the key psychological level of 7 or not “isn’t that crucial” while adding that the capital outflow pressure in China is smaller compared to two years ago. As a reminder DB expect 7.40 next year.

Bond markets were similarly unexciting yesterday. 10y Treasuries ended the session -1.3bps lower at 3.199% and Bunds -0.1bps lower at 0.426%. BTPs ended more or less flat but did pare an early move higher in yield of around +7bps with the rally supported by a downplaying of a Politico report by the EU Commission about the Commission proposing financial sanctions on Italy as soon as November 21st. Finance Minister Tria was quoted as saying in yesterday’s Eurogroup meeting of the Euro-area Finance Ministers that Italy remains committed to reducing its debt ratio and hopes to reach a compromise with the EC while adding that Italy is currently not in the process of changing its budget, but that it was still committed to pursuing a dialogue with the EC.

Meanwhile the data in the US was actually a marginal positive with the ISM non-manufacturing coming in ahead of expectations at 60.3 (vs. 59.0 expected) – albeit down -1.3pts from September’s record reading but still the second-highest since 2005. New orders held relatively steady at 61.5 although employment did nudge down to 59.7 from 62.4 the month prior. That is however  more or less in line with the three-month average. The prices subcomponent actually fell nearly 10pts to 61.7 but still remains at elevated levels. The associated text did however, highlight that “tariffs are beginning to impact business” and that construction firms in particular had asked suppliers to hold pricing for six months. Shortly before this the final services PMI in the US was revised up +0.2pts to 54.8.

Staying with the US, it was interesting to see the chart in our US economists’ “Fed Watcher” note yesterday which suggested that wages (in this case total private average hourly earnings) started accelerating as unemployment approached and breached 4% earlier this year. A tipping point of sorts and this fits in with the trend observed in the 1960s when wages also accelerated when the unemployment rate dropped below 4%. This 1960s comparison was something DB research has highlighted in numerous publications over the last year or so.

In other news, where there were no shortage of headlines yesterday was here in the UK with Brexit newsflow once again peaking in the morning after the weekend noise. Reuters broke with the news quoting ITV political editor Robert Peston as saying that the UK government had settled on a no deal Brexit outcome as the most probable in the event of no deal within the next week. As DB’s Oliver Harvey noted, a December agreement is still possible as is an option of extending the Article 50 timeframe (granted by a short duration) so it’s worth taking this headline with a pinch of salt. Further headlines on Brexit included the Sun as saying that no deal is likely this week and that dates for a possible EU summit had been pushed to the 27th and 28th of November – making a parliamentary vote in the first week of December more likely. There were also reports that Brexit Secretary Dominic Raab might resign but this was later downplayed. Meanwhile, late yesterday night, The Times reported that the EU is preparing to offer the UK PM May an independent mechanism by which Britain could end a temporary customs arrangement with the EU. If true, this could help overcome the key sticking point in Brexit talks. However The Times has been a source of numerous headlines of late and it’s not clear that they all have substance. Sterling closed up +0.56 at $1.304 last night and traded at $1.305 this morning. There is a UK cabinet meeting today to discuss Brexit but it doesn’t feel we’re quite ready yet for a breakthrough. Nevertheless it looks like we are inching towards a deal and then the UK parliamentary fun and games will begin.

On the data front, the UK’s services and composite PMIs both softened, following last week’s drop in the manufacturing PMI. The services metric printed at 52.2 versus expectations for 53.3 and down from 53.9 in September, while the composite index came in at 52.1 versus expected 53.4 and down from 54.1. The composite index is now at its lowest level since the Brexit referendum. Separately, Turkish CPI printed at 25.2% yoy, its highest level since 2003, though the monthon- month figure softened to 2.67% from 6.30% in September. The Turkish lira rallied +2.22% to 5.314, its strongest level since early August.

The US’s sanctions on Iran took effect today, though they issued waivers to eight countries (China, India, Italy, South Korea, Turkey, Taiwan, Greece, and Japan) which will allow them to continue importing Iranian crude oil. The waivers will cover around 1.3 million barrels per day, which would equate to small additional cuts from current export levels and would be consistent with the 2012-2015 experience. There was no indication of how long the waivers would remain in effect, and Brent crude oil traded somewhat listlessly to close -0.11%.

As far as the day ahead is concerned, needless to say the US midterms will dominate. Before that, this morning in Europe the early data release is September factory orders numbers out of Germany. Shortly after that the focus turns to the remaining October services and composite PMIs. No change in the composite reading of 52.7 for the Euro Area is expected. Later this morning we’ll get September PPI for the Euro Area before we get the September JOLTS job openings data in the US. Away from that we’re due to hear from the ECB’s Praet, Coeure and Lautenschlaeger at various stages this morning.