Wednesday November 7th

7-11-2018

Dow poised for a triple-digit rally after midterm elections, Amazon and Caterpillar shares gain

U.S. stock-index futures rose on Wednesday as the U.S. midterm elections played out just as investors expected, with the Democrats winning back the House of Representatives and splitting Congress. Along with gaining clarity on the midterm's outcome, investors were bullish because they believe the Washington gridlock scenario will be best for the market, allowing President Donald Trump's business-friendly policies to continue but keeping a check on some of his more disruptive market actions like the trade battle with China. History has also pointed to strong returns for equity markets when Congress is divided. Dow Jones Industrial Average futures rose 135 points at around 8:00 a.m. ET Wednesday, indicating a higher open of more than 180 points. S&P 500 and Nasdaq 100 futures were also higher. The Dow was up 3.7 percent for the year through Tuesday after an October sell-off leading up the election cut into its returns. Relief that Republicans held onto the Senate also helped boost stocks as some investors feared a so-called blue wave clamping down on Trump's agenda. "The fact that it's playing out as expected gives the administration some ability to keep initiatives alive," said Dan Deming, managing director at KKM Financial. "I think it will be positive in the near term." Stocks were poised for a broad rally, as shares of Caterpillar, Goldman Sachs, Amazon and Alphabet rose in premarket trading Wednesday. Caterpillar is seen getting a boost from continued economic growth and the chance that Democrats can temper Trump's trade war dealings. There's also some optimism the president will work with Democrats on an infrastructure plan. Tech shares rose, as a divided Congress could also keep Trump from seriously going after giants like Amazon for being too big and influential on the economy. Futures fell initially overnight as Democrats took their first seat back in the House and fears of a possible "blue wave" increased. Virginia state Sen. Jennifer Wexton defeated Republican Rep. Barbara Comstock. But then stock futures rebounded as more results started to come in. "The pollsters were correct. The markets went into this, given the close, expecting this outcome," said Quincy Krosby, chief market strategist at Prudential Financial. "Now the market is trying to figure out which sectors will do better." Another notable win for the Democrats came early Wednesday as Jacky Rosen won the Nevada Senate seat, beating incumbent Republican Sen. Dean Heller. On the earnings front, Twenty-First Century Fox is set to report results before the bell on Wednesday, while Qualcomm posts its financials after the bell. Meanwhile, the Federal Reserve is kicking off a two-day meeting on Wednesday. Worries around the pace of interest rate hikes last month saw global markets hit with sharp bouts of volatility. Markets have been pricing in a higher probability of the Fed raising rates again in December, with further tightening seen through 2019. In data, rising interest rates are now clearly taking their toll on potential homebuyers. Total mortgage application volume fell 4 percent last week from a week earlier and plunged 16 percent from a year ago, according to the Mortgage Bankers Association's seasonally adjusted index. Mortgage applications to purchase a home led the volume lower, falling 5 percent for the week to the lowest level in two years. Purchase applications were 0.2 percent lower than a year ago. Consumer credit figures are due at 3 p.m. ET. Equities in the U.S. closed higher on Tuesday as the elections began earlier in the day. Defense stocks are also among the expected winners from a divided Congress as it is one of the areas Democrats and Trump may find common ground. Democrats agreed to a Defense Department budget increase for fiscal year 2019. Art Hogan, chief market strategist at B. Riley FBR, said financials could lose out as the Democrats take control of the House. "In terms of the financials, they might need a bit more deregulation and that is harder to promote under a split Congress," he said. Overall, stocks typically do well when Congress is split and the White House is under Republican control. In those instances, the S&P 500 averages an annual return of 12 percent, according to Bank of America Merrill Lynch. "The best case scenario from here, in our view, might be gridlock: do nothing, and undo nothing," wrote Bank of America Merrill Lynch analysts and economists in a report leading up to the election. These results could also lead to more investigations into Trump and therefore more stock market volatility. But regardless of how the elections shake out, this is the best buying opportunity for investors before year-end, said Phil Blancato, CEO of Ladenburg Thalmann Asset Management. "This is your entry point," he said, adding that positive seasonal factors, including strong holiday sales, should boost markets higher before the end of 2018. "You might get some volatility in the next couple of days as the market absorbs the result, but you buy those dips. ... Everything is telling you this is the time to buy" following the correction in October. Reactions in Asian stock markets were relatively muted on Wednesday afternoon as results filtered in from the much-anticipated midterm elections in the U.S. Major indexes. apan's Nikkei 225 fell 61.95 points, or 0.28 percent, to 22,085.8 while the Topix index declined 6.92 points, or 0.42 percent, to 1,652.43. South Korea's Kospi fell 10.93 points, or 0.52 percent, to 2,078.69. In Hong Kong, the Hang Seng index was up 0.12 percent in late-afternoon trade. The Shanghai composite was down 18.01 points, or 0.68 percent, at 2,641.34 while the Shenzhen composite was down 5.81 points, or 0.43 percent, at 1,340.37. Oil rebounded towards $73 a barrel on Wednesday after falling to its lowest since August, supported by a report that Russia and Saudi Arabia are discussing oil output cuts in 2019. Crude rebounded from an earlier loss after Russia's TASS news agency, citing an unnamed source, reported that the two countries have started bilateral discussions over possible 2019 oil production cuts. "I think this is a little bit of verbal intervention, trying to get some speculative length back into the market," said analyst Olivier Jakob of Petromatrix, referring to the talk of possible supply curbs. Brent crude, the global benchmark, rose $1.18 to $73.31 a barrel by 1017 GMT. The contract hit $71.18 on Tuesday, its lowest since Aug. 16. U.S. crude rose 28 cents to $62.49. Gold came off a one-week low to trade higher on Wednesday as investors sought cover from market volatility and uncertainty surrounding the fallout of U.S. mid-term elections results. Spot gold was up 0.3 percent at $1,230.26 per ounce, as of 0752 GMT, having touched its lowest since Nov. 1 at $1,222.90 earlier in the session. U.S. gold futures climbed 0.5 percent to $1,232.2 per ounce.