US stocks gained as investors eyed prospects for gridlock from midterm elections. Treasury yields eased while the dollar trimmed losses.
(Bloomberg) — US stocks gained as investors eyed prospects for gridlock from midterm elections. Treasury yields eased while the dollar trimmed losses.
The S&P 500 pulled back from session highs along with the tech-heavy Nasdaq 100 and the blue-chip Dow Jones Industrial Average. The yield on two-year Treasuries, more sensitive to Federal Reserve policy changes, shed 4 basis points, while a gauge of dollar pared declines.
A history of robust performance following midterm results has helped buoy optimism about the outlook for equity markets. While polls suggest Republicans could make gains, thereby placing a check on Democratic policies, there are multiple scenarios. The best outcome for Treasuries could be a Republican control of both the House of Representatives and Senate, while the dollar could find support should Democrats keep both chambers.
“Investors are buying ahead of what they think will be a firm Republican sweep of both Houses,” said Zachary Hill, head of portfolio management at Horizon Investments, also noting the S&P 500 trading above the key technical 50-DMA level.
Read more on elections:
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Still, for many the biggest headwind for markets is the Fed’s monetary tightening with Thursday’s consumer-price-index data the next event risk coming on the heels of core consumer prices rising more than forecast to a 40-year high in September. Even if prices begin to moderate, the CPI is far above the Fed’s comfort zone.
Going forward, though, there may be a silver lining in gridlock for policy makers, according to Art Hogan, chief market strategist at B. Riley Wealth.
“Divided government, particularly leading into a presidential election, will most likely create a standstill where very little gets done,” Hogan wrote. “That’s probably a good thing for the Fed because various stimuli have not made their work easier.”
More commentary
- “The more and more you just get polls or even some slight acknowledgements from places that the Republicans are probably going to take up at least one chamber of Congress, I think the market is actually seeing that as a good outcome,” Shawn Cruz, head trading strategist at TD Ameritrade, said in an interview. “They actually want a little bit of gridlock out of Washington.”
- “The inflation statistics are going to be more important than the election,” Michael Darda, chief economist at MKM Partners, said on Bloomberg TV. “Inflation will tend to lag the cycle so if you have the Fed chasing down lagging indicators with a very rapid succession of interest rate increases and quantitative tightening, there is a very significant risk that the Fed significantly overshoots neutral.”
- “The gridlock rally is a bit overdone, as we were already there,” said Victoria Greene, G Squared Private Wealth CIO. “Investors will need to temper expectations on results coming in this evening. Many contested races it might be weeks, or god forbid, months before we know results. Politics matters personally, less so to the markets.”
Treasuries gained across the board Tuesday, with the benchmark 10-year rate dropping as much as 8 basis points. Meanwhile, traders shaved bets on rate hikes, with swap markets still leaning toward a 50 basis-point Fed hike in December.
Nvidia Corp. climbed as it began producing a processor for China. Take-Two Interactive Software Inc. fell after reducing its forecast for net bookings.
Europe’s Stoxx 600 rallied, after a weak open. Chinese equities halted a rally as traders considered a jump in virus infections and official comments defending Covid Zero.
Key events this week:
- US midterm elections, Tuesday
- EIA oil inventory report, Wednesday
- China aggregate financing, PPI, CPI, money supply, new yuan loans, Wednesday
- US wholesale inventories, MBA mortgage applications, Wednesday
- Fed officials John Williams, Tom Barkin speak at events, Wednesday
- US CPI, US initial jobless claims, Thursday
- Fed officials Lorie Logan, Esther George, Loretta Mester speak at events, Thursday
- US University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 rose 0.5% as of 1:30 p.m. New York time
- The Nasdaq 100 rose 0.7%
- The Dow Jones Industrial Average rose 0.8%
- The MSCI World index rose 0.8%
Currencies
- The Bloomberg Dollar Spot Index fell 0.4%
- The euro rose 0.5% to $1.0069
- The British pound rose 0.3% to $1.1551
- The Japanese yen rose 0.6% to 145.70 per dollar
Cryptocurrencies
- Bitcoin fell 9.4% to $18,745.69
- Ether fell 13% to $1,375.87
Bonds
- The yield on 10-year Treasuries declined seven basis points to 4.15%
- Germany’s 10-year yield declined six basis points to 2.28%
- Britain’s 10-year yield declined nine basis points to 3.55%
Commodities
- West Texas Intermediate crude fell 2.7% to $89.29 a barrel
- Gold futures rose 2.3% to $1,718.80 an ounce
–With assistance from Jan-Patrick Barnert, Haidi Lun, Brett Miller, Srinivasan Sivabalan, Emily Graffeo, Natalia Kniazhevich and Vildana Hajric.
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