U.S. and Canadian stock futures point to a negative open Tuesday ahead of U.S. midterm elections that will be the first test of U.S. President Donald Trump’s sweeping tax cuts and hostile trade policies and could roil the markets depending on the outcome.
Polls point to his Republican party losing control of the House of Representatives to the Democrats which could curb some of Trump’s policymaking power. That could create some political gridlock, which has historically been a positive for investors but could slow deregulation that could lift financial stocks.
Opinion polls and election forecasters favour Democrats to secure the minimum 23 seats they need to capture a majority in the U.S. House of Representatives, which would enable them to stymie Trump’s legislative agenda and investigate his administration.
Investors are also watching the continuing parade of corporate earnings.
“It is definitely not the time to buy the dip,” said London & Capital’s Chief Investment Officer Pau Morilla-Giner, referring to U.S. and globally-focused stock markets and risk assets.
“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.”
On Monday, stocks finished mixed with the S&P/TSX, the S&P and Dow finishing higher and the Nasdaq lower as Apple shares continued to slide.
Overseas, Japan and Hong Kong had helped Asia overcome another Chinese wobble, but Europe slipped into the red early on as investors pounced on some corporate earnings misses and pre-U.S. midterms caution took hold.
Italian and Spanish stocks weakened as updated PMI figures confirmed euro zone business growth had fallen to a two-year low last month against the backdrop of 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.
Italian government bond yields were also pushing up after euro zone finance ministers called on Rome to change its budget at a meeting on Monday.
That had done little to ease the standoff between Italy and the European Union over the spending plan. With Rome not likely to bow to the demands any time soon it reignited concerns about a further escalation in the feud.
Britain’s FTSE was down 0.7 per cent, Germany’s DAX was off 0.2 per cent and France’s CAC fell 0.3 per cent.
In Asian trading, MSCI’s broadest index of Asia-Pacific shares ex-Japan edged up 0.4 per cent following a positive finish for Wall Street on Monday.
Japan’s Nikkei also climbed 1.1 per cent though weaker Chinese markets and regional technology shares capped the region. China’s Shanghai index fell 0.2 per cent but Hong Kong’s Hang Seng rose 0.7 per cent.
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 per cent lower in U.S. trade.
Commodities
Oil prices declined on Tuesday after Washington granted sanctions exemptions to top buyers of Iranian oil, lifting supply concerns and turning the market’s focus to worries that an economic slowdown may curb fuel demand.
Benchmark Brent crude futures were down 20 cents at US$72.97 a barrel. U.S. West Texas Intermediate crude futures were at US$62.98 a barrel, down 12 cents from their last settlement.
Washington gave 180-day exemptions to eight importers - China, India, South Korea, Japan, Italy, Greece, Taiwan and Turkey. This group takes as much as three-quarters of Iran’s seaborne oil exports, trade data shows, meaning Iran will still be allowed to export some oil for now.
Iran’s crude exports could fall to little more than 1 million barrels per day (bpd) in November, roughly a third of their mid-2018 peak. But traders and analysts say that figure could rise from December as importers use their waivers.
Gold edged up on Tuesday as investors sought shelter from uncertainty over the outcome of the U.S. midterm elections.
Spot gold rose 0.3 per cent to US$1,235.10 per ounce, while U.S. gold futures were up 0.4 per cent at US$1,236.70.
“One scenario (from the elections) is that both houses are retained by the Republicans, and this could be negative for gold,” said Hussein Sayed, chief market strategist at FXTM.
“The opposite scenario could send equity markets much lower, boosting gold. Such uncertainty is keeping gold steady at the moment.”
Currencies and bonds
The Canadian dollar slid lower in trading Tuesday to the 76.2 US cent mark.
“USD/CAD continues to oscillate around the 1.3100 (76.33 cents US) threshold ahead of today’s U.S. mid-term elections. We stress that prices will have to close below support at 1.3070 (76.51 cents US) in order to end the uptrend that has been in place since early October,” said RBC in a note.
The U.S. dollar edged up on Tuesday but its gains were limited by investor caution about the U.S. midterm elections and any fallout for the world’s largest economy.
The greenback has outperformed most major currencies this year, benefiting from the robust U.S. economy and rising interest rates. Investors are focused on whether congressional elections could disrupt the stellar run of the world’s most liquid currency.
Analysts believe a divided Congress will see the dollar dip because it is unlikely that any new fiscal stimulus could be launched to counterbalance forecasts of slowing U.S. economic growth next year.
That, in turn, would boost emerging market currencies hindered this year by higher U.S. rates, in particular those currencies running big external imbalances such as Turkey, Argentina and South Africa.
But some analysts warn that an unexpected outcome could trigger an unwinding of long positions on the dollar which has rallied more than 7 per cent from April lows against its rivals.
“Polls have been wrong before .... Should the Republicans surprisingly hold Congress, the dollar, equities and Treasury yields would get a lift on the promise of Trump 2.0,” said ING FX strategist, Petr Krpata.
The uncertainty kept investors from making big moves on Tuesday.
“Markets are in a holding pattern,” said Credit Agricole head of G10 FX Strategy Valentin Marinov. “Yes, some traders might take profits on extended dollar long positions but we’re not expecting a big or immediate impact whichever way the election goes.”
The 10-year U.S. Treasury note yield was down slightly at 3.195 per cent and the Canada 10-year bond yield was at 2.511 per cent, also down slightly.
Stocks to watch
U.S. hotel chain Marriott International Inc. on Monday cut its fourth-quarter forecast for a key measure of hotel health, blaming uncertainty related to weak demand in North America, its biggest market. Marriott’s shares fell 5.3 per cent, overshadowing a higher-than-expected third quarter profit.
Thomson Reuters Corp. on Tuesday reported a smaller-then-expected fall in third-quarter earnings and said it was on track for a solid 2018 and a better performance in 2019. Adjusted for one-time items, it reported earnings per share of 11 cents US, down from 27 cents US a year ago, but above Wall Street’s average estimate of 3 cents US per share, according to IBES data from Refinitiv.
Randgold Resources said on Tuesday its third-quarter profit rose 25 per cent on the previous quarter, helped by lower costs, a day before its shareholders vote on a $6.1-billion tie-up with Barrick Gold. Randgold shares rose 0.8 per cent in premarket trading. On Monday, Barrick shareholders approved the deal.
Canadian fertilizer and farm supplies dealer Nutrien Ltd. reported a better-than-expected quarterly profit and raised its full-year adjusted profit forecast, driven by strong demand for its potash fertilizers.
Booking Holdings, Priceline’s parent company, gained 6 per cent after the online travel agency forecast fourth-quarter profit above estimates.
CVS Health Corp. reported an 8.2-per-cent rise in quarterly profit on Tuesday, helped by higher sales of prescription drugs at its stores and a smaller tax bill. The drugstore chain, which expects to close its US$69-billion acquisition of health insurer Aetna Inc. this year, said net income rose to US$1.39-billion, or US$1.36 per share, from US$1.29-billion, or US$1.26 per share, a year earlier. Net revenue rose 2.4 per cent to US$47.27-billion. Its shares rose 2.6 per cent in premarket trading.
Eli Lilly and Co. topped Wall Street estimates for third-quarter profit on Tuesday and raised its yearly earnings target, led by stronger demand for its newer drugs such as diabetes treatment Trulicity and psoriasis medicine Taltz. Net income more than doubled to US$1.15-billion. Excluding one-time items, Lilly earned US$1.39 per share, above analysts’ average estimate of US$1.35 per share, according to IBES data from Refinitiv. Revenue rose about 7 per cent to US$6.06-billion, edging past analysts’ expectations of $6.05 billion. Its shares rose 3.5 per cent in premarket trading.
Facebook said it blocked 115 accounts for suspected “co-ordinated inauthentic behaviour” linked to foreign groups attempting to interfere in Tuesday’s U.S. midterm elections. The social media company shut down 30 Facebook accounts and 85 Instagram accounts and is investigating them in more detail, it said in a blog post late Monday. Its shares were down 0.4 per cent in premarket trading.
Toyota Motor Corp. said it sees room to expand in China as growing sales of its luxury brand Lexus help it buck an emerging trend of slowing demand which has hit profit at some of its global rivals. Japan’s biggest automaker also raised its full-year operating profit forecast by 4.3 per cent, saying improved marketing pushed up sales in China, Europe and elsewhere, while a weaker yen will have a bigger positive impact.
Upscale fashion group Ralph Lauren Corp. topped Wall Street estimates for quarterly revenue on Tuesday, as a strategy to intensify marketing on social media and open more stores in Asia bore fruit. The New York-based company’s net income rose to US$170.3 million or US$2.07 per share. Revenue climbed 1.6 per cent to US$1.69 billion and topped analysts’ average estimate of US$1.65 billion, according to IBES data from Refinitiv.
Earnings include: Archer-Daniels-Midland Co.; BTB REIT; Bausch Health Companies Inc.; Black Diamond Group Ltd. CCL Industries Inc.; Canadian Apartment Properties REIT; Dream Industrial REIT; Gibson Energy Inc.; Granite REIT; IAMGold Corp.; Indigo Books & Music Inc.; Information Services Corp.; Intact Financial Corp.; International Petroleum Corp.; Jamieson Wellness Corp.; Keyera Corp.; Largo Resources Ltd.; Morneau Shepell Inc.; Northland Power Inc.; Northview Apartment REIT; Osisko Gold Royalties Ltd.; Pan American Silver Corp.; Pizza Pizza Royalty Corp.; Ritchie Bros Auctioneers; ShawCor Ltd.; Slate Office REIT; Spin Master Corp.; Stuart Olson Inc.; Summit Industrial Income REIT; Surge Energy Inc.; Tahoe Resources Inc.; Thomson Reuters Corp.; Trinidad Drilling Ltd.; Wajax Corp.; WPT Industrial REIT; Yellow Pages Ltd.
Other reading: Tuesday’s small-cap stocks to watch
How today’s midterms could move tomorrow’s markets: Three scenarios (and only one is pain-free)
Economic news
(8:30 a.m. ET) Canadian building permits for September. Analyst estimate is an increase of 0.5 per cent from August.
(10 a.m. ET) U.S. Job Openings and Labor Turnover Survey (JOLTS) for September.
Also: U.S. midterm elections
With files from Reuters