US stocks fell on Wednesday as investors digested the results of tighter than expected midterm elections and looked ahead to a closely watched inflation update on Thursday.
Wall Street’s benchmark S&P 500 fell 2.1 per cent, while the tech-heavy Nasdaq Composite slid 2.5 per cent.
Many pollsters had predicted a “red wave” of Republican victories before Tuesday’s vote, but early results showed Democrats performing better than expected with control of Congress still hanging in the balance.
Kevin McCarthy, the Republican leader in the House of Representatives, said his party was on track to regain control of the lower chamber, where it needs a net gain of five seats for a majority. The battle for the Senate remained in the balance, with races in Arizona and Nevada on a knife edge and Georgia set to go to a run-off election in December.
A divided government is often seen as positive for US stock markets, as gridlock between Congress and the White House reduces the likelihood of passing disruptive new regulations or tax increases.
Mike Zigmont, head of trading and research at Harvest Volatility Management, said Wednesday’s declines partly reflected the fact that markets had pre-emptively priced in a more convincing Republican victory.
“If you asked a bunch of hedge funds yesterday, they thought there were going to be [more Republican wins] and a nice pop today. A lot of that money front-ran the election last week and some of that money has now come back out,” he said.
Despite the short-term effect of the midterms, however, most investors believe this week’s inflation data will have a bigger bearing on markets’ longer-term trajectory.
David Donabedian, chief investment officer at CIBC Private Wealth, said “the big picture probably won’t change very much” as a result of the midterms. “If the Republicans gain even a small majority in one house or another then certain policy issues would be off the table . . . we know how that looks, so then think let’s get back to inflation and the Fed and corporate earnings.”
The Federal Reserve last week lifted its main interest rate by 0.75 percentage points for the fourth meeting in a row, and chair Jay Powell warned the US central bank still had “some way to go” in its efforts to bring down inflation.
Data released on Thursday is expected to show the consumer price index’s core measure of inflation, which strips out volatile energy and food costs, remains close to its highest level in four decades.
The dollar index strengthened 0.8 per cent on Wednesday. In government bond markets, the yield on the 10-year Treasury slipped 0.03 percentage points to 4.10 per cent. Yields fall when prices rise.
Elsewhere, the fall in bitcoin continued, giving up close to 14 per cent on Wednesday to drop below $16,000 after the near-collapse of Sam Bankman-Fried’s FTX, one of the world’s largest crypto exchanges, prompted a broad sell-off in crypto assets.
In China, the CSI 300 index of Shanghai- and Shenzhen-listed stocks dropped 0.9 per cent, while Japan’s Topix shed 0.4 per cent and Hong Kong’s Hang Seng fell 1.2 per cent.
The Hang Seng Mainland Properties index rose 4 per cent after Beijing expanded a programme to support bond sales in the sector, which had been hit by a liquidity crisis.
Europe’s Stoxx 600 retreated 0.3 per cent, trimming earlier losses, and London’s FTSE 100 fell 0.1 per cent.
Additional reporting by Jaren Kerr in New York
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