STOCK MARKET OUTLOOK:
- S&P 500 rises for the third straight day, closing at its best level since last Wednesday
- Midterm election results may guide stocks in the coming days
- Looking beyond politics, all eyes will be on the U.S. inflation report on Thursday
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U.S. stocks extended their rebound on Tuesday in a volatile session, rising for the third consecutive day, supported by bullish sentiment as traders awaited results from the U.S. midterm elections, which could be available later tonight or tomorrow.
When it was all said and done, the S&P 500 gained 0.56% to end at 3,828, moving decisively above its 50-day simple moving average and closing at its best level since last Wednesday. Meanwhile, the Nasdaq 100 climbed 0.75% to 11,059, bolstered by a steep pullback in U.S. Treasury yields.
While the mood was positive on Wall Street, the sell-off in digital assets seemed to have limited risk appetite. For context, Bitcoin and Ethereum were on a wild ride and suffered heavy losses on news that FTX experienced a liquidity crisis and had to be bailed out by Binance, a situation that heightened fears about instability in the industry.
Focusing on the near-term calendar, there are no relevant economic releases on Wednesday, but investors will be closely watching the midterm election results. Most polls suggest that the Republican Party could gain a majority in the House of Representatives and possibly the Senate, putting an end to the Democrats’ unified government.
A shift in congressional power is likely to bring the legislative process to a halt, paralyzing President Biden’s agenda for the remainder of his term. However, political gridlock in Washington may not translate into equity market weakness, as it may be met by a less aggressive central bank down the road.
Looking beyond politics, all eyes will be on the October U.S. consumer price index report due out on Thursday. Headline CPI is expected to have risen 0.6% m-o-m, bringing the annual rate to 8.0% from 8.2% in September. Meanwhile, the core gauge is seen clocking in at 0.5% m/m and 6.5% y/y.
For stocks to extend their recovery on a sustained basis, price pressures must show significant signs of slowing. However, if data surprises to the upside as in previous months, expectations for the Fed’s terminal rate will drift higher, reinforcing the likelihood of a 75 bp hike at the December FOMC meeting. This scenario could trigger a large sell-off in the S&P 500 and Nasdaq 100.
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S&P 500 DAILY CHART
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—Written by Diego Colman, Market Strategist for DailyFX