European stocks struggled to make gains on Tuesday and the dollar picked up as traders pulled back on hopes that China could ease its zero-COVID policy and showed signs of caution ahead of US mid-term elections.
Markets had started the week with a “risk-on” tone, which some analysts attributed to hopes that China could relax its strict COVID-19 lockdown measures. Markets have also been buoyed by some investors expecting the US Federal Reserve to take a more dovish tone.
But the move showed signs of losing momentum on Tuesday as Asian stocks saw only small gains. The yuan weakened against the dollar and Chinese stocks slipped as COVID-19 cases rose.
European stocks indexes opened in the red, then became mixed. Wall Street futures were down.
“I don’t see the rationale for expecting a softer tone from Xi and the rest of the Chinese party,” said Tom Caddick, managing director at Nedgroup Investments, referring to China’s President Xi Jinping, noting that Chinese officials have repeatedly affirmed the zero-COVID policy.
At 0945 GMT, the MSCI world equity index, which tracks shares in 47 countries, was up 0.2%.
Europe’s STOXX 600 was up 0.2%, holding just below the previous session’s high, which was its highest in nearly two months.
London’s FTSE 100 was down 0.2%, France’s CAC 40 was down 0.2% but Germany’s DAX was up 0.3%.
Investors were focused on the US mid-term elections, in which control of the US House of Representatives is at stake. Non-partisan forecasters expect Republicans to win a majority in the chamber, which would allow them to block President Joe Biden’s legislative agenda.
Voting results may take days to become known.
A split government is generally seen by analysts as a more market-positive outcome. Options market strategists said that a surprise victory for Democrats could prompt a negative market reaction.
Nedgroup Investments’ Tom Caddick said that a divided Congress could be seen as “broadly neutral to mildly positive” for stocks in the sense that it would provide some visibility that there is unlikely to be dramatic policy changes in future.
But, he said, “a truly market-positive outcome at this stage would be a stronger read coming through for the Democrats because if we get a Republican shift and you get this locked US political stalemate, there’s very little opportunity for change and for the incumbent to actually implement any of their policies.”
RBC Capital Markets analysts said in a client note that “the market has positioned itself for a modest positive risk tone if the Republicans are able to take control of the house and an even larger positive shock if Republicans take control of both chambers.”
“The market is wanting to cling to any positive news and a market positive Midterm result could mean another risk positive day,” RBC said.
The safe-haven US dollar was up 0.1% against a basket of currencies, while the euro was down 0.2% at $0.9996 .
Euro zone government bond yields were a touch higher, with the benchmark 10-year German yield at 2.342%, as traders waited for key inflation data later in the week and hopes for a quick end to the central bank’s cycle of rate increases faded.
The European Central Bank will continue to raise borrowing costs even as the euro zone economy suffers because letting inflation stay high would be even more painful, two top ECB policymakers said on Tuesday.
In Britain, grocery price inflation hit 14.7% in October, data from market researcher Kantar said. The British pound was down 0.4% against the dollar, at $1.1478.
Oil prices fell on fears of lower demand from China.