Stocks, futures fall as focus turns to midterms: markets wrap

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% 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 a 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 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.”

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% to 4% at last week’s meeting. Rates are expected to peak slightly above 5% 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 $91 a barrel, after easing almost 1% on Monday.

Key events this week:

• Euro-zone retail sales, Tuesday
• 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 Stoxx Europe 600 was down 0.1% as of 8:34 a.m. London time
• Futures on the S&P 500 fell 0.2%
• Futures on the Nasdaq 100 fell 0.3%
• Futures on the Dow Jones Industrial Average fell 0.1%
• The MSCI Asia Pacific Index rose 0.6%
• The MSCI Emerging Markets Index rose 0.1%

Currencies

• The Bloomberg Dollar Spot Index rose 0.2%
• The euro fell 0.2% to $0.9995
• The Japanese yen was little changed at 146.70 per dollar
• The offshore yuan fell 0.6% to 7.2728 per dollar
• The British pound fell 0.3% to $1.1476

Cryptocurrencies

• Bitcoin fell 4.6% to $19,738.96
• Ether fell 5.7% to $1,486.17

Bonds

• The yield on 10-year Treasuries advanced two basis points to 4.23%
• Germany’s 10-year yield advanced three basis points to 2.37%
• Britain’s 10-year yield advanced five basis points to 3.68%

Commodities

• Brent crude fell 0.3% to $97.67 a barrel
• Spot gold fell 0.4% to $1 669 an ounce