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US stock-index futures fell with European equities amid growing nervousness before Tuesday’s midterm elections and Thursday’s inflation print. Fading hopes for a more lenient Covid policy in China added to the lackluster sentiment.
Futures on the S&P 500 and Nasdaq 100 indexes dropped at least 0,2 percent each after US stocks posted a second-day rally on Monday. The Stoxx Europe 600 Index declined from an eight-week high. Treasuries and gold traded lower. The dollar rebounded after a two-day slide.
Bulls have charged back into equity markets over the past two days amid expectations the midterm results could herald a near-term rally. While polls suggest Republicans could make gains, thereby placing a check on Democratic policies, investors are busy examining multiple scenarios.
The best outcome for Treasuries could be Republican control of both the House of Representatives and Senate, while the dollar could find support should Democrats keep both chambers.
“The US debt burden could stop the Democrats from putting in place many economic reforms that they would’ve otherwise, if Republicans are sufficiently crowded to block them from moving forward,” Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, wrote in a note. “Hence, slowing debt under GOP could slow growth.”
Treasuries fell across the curve Tuesday, with the 10-year yield adding 2 basis points. The losses underscored the fragile sentiment in markets where the Federal Reserve’s monetary tightening remains the biggest headwind. Thursday’s consumer-price-index data may offer the next cue for traders even as money markets are raising their peak-rate wagers.
The inflation reading is coming after the core consumer price index rose 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.
“Inflation is going up. It may be coming down periodically. But it’s going up,” Richard Harris, chief executive of Port Shelter Investment Management, said on Bloomberg Television. “The market is kind of uncertain — it’s hoping for the best but really should be preparing for the worst.”- Bloomberg
Meanwhile, swaps markets are leaning toward a 50 basis-point Fed rate increase in December, after a fourth consecutive jumbo hike to a target range of 3,75 percent to 4 percent at last week’s meeting. Rates are expected to peak slightly above 5 percent around mid-2023.
JPMorgan Chase & Co.’s Marko Kolanovic warned of the risk to stocks from ongoing Fed hawkishness, and Morgan Stanley’s Mike Wilson said companies will need to aggressively shrink expenses, including through layoffs, before he becomes more optimistic on US equities.
Already, signs of stress in US corporate performance are becoming visible. Of the 441 S&P 500 companies that have reported quarterly results, almost a quarter have missed profit forecasts.
Europe’s Stoxx 600 fell, dragged by real estate, automobile and consumer stocks. Chinese equities halted a rally as traders considered a jump in virus infections and official comments defending Covid Zero.
China’s renewed commitment to keep strict pandemic controls sparked a decline in oil. West Texas Intermediate futures dropped toward US$91 a barrel, after easing almost 1 percent on Monday. Bloomberg
Online Reporter