By Elizabeth Howcroft
LONDON (Reuters) -European shares rose and Wall Street futures edged higher on Tuesday, as market focus turned to the U.S. mid-term elections, which analysts say could lead to a boost for equities.
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 in recent sessions by some investors expecting the U.S. Federal Reserve to take a more dovish tone.
That move lost some momentum early 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 opened in the red, but recovered during the morning session.
At 1226 GMT, the MSCI world equity index, which tracks shares in 47 countries, was up 0.1%.
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 little changed and Germany’s DAX was up 0.3%.
Control of the U.S. House of Representatives is at stake in the U.S. mid-term elections. 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.
Wall Street futures were up, with S&P 500 e-minis up 0.1% and Nasdaq e-minis up 0.4%.
Tom Caddick, managing director at Nedgroup Investments, 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 U.S. political stalemate, there’s very little opportunity for change and for the incumbent to actually implement any of their policies.”
Mid-term elections are “one of the best historical buy signals for equities we have,” Deutsche Bank analysts said in a note to clients, noting that in the 19 mid-term elections since World War Two, “the S&P 500 has always been higher one year after the vote.”
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 mid-term result could mean another risk positive day,” RBC said.
The safe-haven U.S. dollar was up 0.2% against a basket of currencies, while the euro was down 0.2% at $0.99945 .
Euro zone government bond yields were a touch higher, with the benchmark 10-year German yield at 2.354%, 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.
Oil prices fell on fears of lower demand from China.
(Reporting by Elizabeth Howcroft; Editing by Robert Birsel and Susan Fenton)
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