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U.S. and Canadian stock markets are taking a positive view of the U.S. midterm election results, which played out as expected, with the Republicans losing the House of Representatives to the Democrats but keeping control of the Senate.

A Democrat-controlled House will hamper Trump’s pro-business agenda and could lead to uncertainty about his administration, but few worry about a reversal in already-enforced corporate tax cuts and deregulation measures that have played a large hand in the U.S. market’s rally since the 2016 election.

The results for the Republicans were no worse than feared and pointed to a political gridlock that was largely expected by investors, leaving them free to buy back into a market that had its worst month in seven years in October.

“Given what futures are pointing to right now, I think it’s probably a sign that on balance Republicans have marginally outperformed,” said Geoffrey Yu, head of U.K. Chief Investment Office at UBS Global Wealth Management.

“The big question from here is do we add risk. Given how weak markets were in October, there is a slightly stronger case for us to outperform in the short-term.”

Markets always prefer certainty and with the election over, investors can focus on their next moves.

“The good news in a way for markets is that there was an uncertainty that’s now been removed. We know where we stand for the next two years, and investors will focus back on the fundamentals, which are (company) earnings growth and the economy,” said Guy Miller, chief market strategist at Zurich Insurance Group.

“Even with a split government, I expect more fiscal stimulus ahead. There is some possibility for compromise on infrastructure spending as well,” said Steve Friedman, a senior economist at BNP Paribas Asset Management.

Attention will also focus on Trump’s hard line on trade tariffs, which he can impose without Congressional approval. That keeps alive worries about a trade war between China and the United States.

“We would argue that if Trump can do less on the domestic front, he is more likely to focus on external matters such as trade, which will impact risk sentiment,” said Patrick O’Donnell, investment manager at Aberdeen Asset Management in London.

On Tuesday, markets closed higher in anticipation of the outcome of the U.S. midterm elections.

Overseas, after volatile Asian trade, where stocks and the dollar swung on the Republicans’ fluctuating prospects, a pan-European stocks benchmark jumped around one percent while MSCI’s world equity index was up 0.5 per cent.

Britain’s FTSE rose 1.1 per cent, Germany’s DAX added 0.95 per cent and France’s CAC rose 1.3 per cent.

Sylvain Goyon, head of equity strategy at the Oddo brokerage in Paris, said many investors had been on the sidelines before the election, due to what he called “an uncertainty premium,”

“Now it’s behind us, there’s a good reason for them to get back to the market,” he said.

Most analysts agree the newly empowered House Democrats will have the ability to investigate Trump’s tax returns, possible business conflicts of interest and allegations involving his 2016 campaign’s links to Russia.

Moreover, a split Congress will be able to hamper Trump’s push for a further round of tax cuts and deregulation – measures that have turbo-charged the U.S. economy, stock markets and the dollar.

The U.S. Federal Reserve starts its two-day monetary policy meeting later Wednesday, but is expected to raise rates next only when it meets in December.

Asian markets were mixed with Japan’s Nikkei falling 0.3 per cent, China’s Shanghai index off 0.7 per cent but Hong Kong’s Hang Seng rose 0.1 per cent.

Commodities

Oil rebounded to US$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.

Russia’s TASS news agency, citing an unnamed source, reported that the two countries, the biggest producers in an OPEC-led alliance that has been limiting supply since 2017, have started bilateral talks on the issue.

“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. “The global supply and demand balance does not look very tight next year.”

Brent crude, the global benchmark, rose US$1.04 to US$73.17 a barrel. The contract hit US$71.18 on Tuesday, its lowest since Aug. 16. U.S. crude rose 68 cents to US$62.89.

While Iranian oil exports are expected to fall because of U.S. sanctions that took effect on Monday, reports from OPEC and other forecasters have indicated that the global market could see a 2019 supply surplus as demand slows.

Gold rose on Wednesday as U.S. midterm elections delivered a split Congress and pressured the dollar, with investors now turning their attention to the U.S. Federal Reserve meeting for clues on future interest rate hikes.

Spot gold was up 0.6 per cent to US$1,233.88 per ounce, while U.S. gold futures climbed 0.7 per cent to US$1,235.40 per ounce.

“This outcome of the midterm elections was expected by the financial markets. It would have been a big thing if gold was surprised by that,” said Julius Baer analyst Carsten Menke.

“Today we just see gold moving in lock-step with dollar, the dollar is down and that is what is mirrored in the gold price.”

The dollar index fell half a per cent against its main rivals, making bullion more attractive for holders of other currencies, as a split Congress dampened expectations for a major fiscal policy boost to the economy.

Currencies and bonds

The Canadian dollar was trading at 76.4 cents US as oil prices gained Wednesday.

“Weaker crude oil prices have kept USD/CAD above $1.3100 (76.33 cents US) as the market digests the results of the US mid-term elections. Prices will have to pierce support at $1.3080 (76.45 cents US) in order to nullify the current uptrend, with $1.3170 (75.93 cents US) serving as resistance,” said a note from RBC Capital Markets.

The U.S. dollar’s losses accelerated on Wednesday with an index falling half a per cent against its main rivals as the outcome of a split U.S. Congress raised expectations that any major U.S. fiscal policy boost to the economy is unlikely for now.

The greenback has been the surprise winner in the global currency markets this year on the back of President Donald Trump’s fiscal stimulus and strong economic data which has forced the U.S. Federal Reserve to signal higher interest rates.

But market watchers believe the outcome of the U.S. midterm, with Democrats taking the House and Republicans keeping control of the Senate, makes any further U.S. policy boost difficult. Trump’s policies may also come under greater scrutiny, fueling fresh political uncertainty.

Prospects of less fiscal stimulus would also relieve the pressure on the Fed to keep raising interest rates and add downward pressure on U.S. Treasury yields and the dollar. Yields on U.S. debt were down 3 to 5 basis points across the board.

Swap markets currently expect about 65 basis points in cumulative rate hikes until September 2019, though traders say that might fall further if bond yields extend their decline.

“There is a growing assumption that the room for another dose of stimulus for the Trump administration is going to be very limited and that is pushing the dollar lower,” said Piotr Matys, an FX strategist at Rabobank in London.

Against a basket of its rivals , the dollar sank 0.5 per cent to 95.758, its lowest level in more than two weeks.

The yield on 10-year U.S. Treasury debt was down four basis points at 3.18 per cent. The Canadian 10-year bond yield was also down slightly at 2.528 per cent.

Stocks to watch

A deal in the works for Rogers Communications Inc. to sell most of its magazines to the publisher of The Hockey News, Roustan Media Ltd., has fallen apart at the last minute. The Toronto-based telecommunications and media company is still seeking a buyer for the magazines, according to sources familiar with the process. The Globe and Mail first reported in August that Rogers put eight print and digital titles on the block – Maclean’s, Canadian Business, MoneySense, Today’s Parent, Hello! Canada, Flare and Chatelaine’s French and English editions – along with its custom-content group, which produces marketing content such as in-house magazines for various companies. Rogers hired the investment-banking arm of Canadian Imperial Bank of Commerce to manage the sale.

Imperial Oil Ltd. said on Tuesday that it would go ahead with the construction of its $2.6-billion Aspen project in northern Alberta, the first new oil sand development to be greenlighted since 2013. The Calgary-based company, which is majority owned by Exxon Mobil, said it would start construction on the 75,000-barrel-per-day project in the fourth quarter of 2018 with first output expected in 2022.

CGI Group Inc. topped expectations as it reported its fourth-quarter profit and revenue grew compared with a year ago. The IT and business consulting firm says it earned $293.5-million or $1.03 per diluted share for the quarter ended Sept. 30. Revenue totalled nearly $2.8-billion, up from nearly $2.61-billion in the fourth quarter last year. Excluding specific items, CGI says it earned $309.8-million or $1.09 per diluted share. Thomson Reuters Eikon says analysts on average had expected a profit of $1.07 per share for the quarter.

Michael Kors missed Wall Street estimates for quarterly revenue on Wednesday hurt by lower sales at its retail outlets in Europe, where the U.S.-based fashion group is struggling to create a stronger luxury identity. Its shares fell 11.3 per cent in premarket trading following the news.

Kraft Heinz Co. has agreed to sell its Canadian natural cheese business to Parmalat SpA in a $1.62-billion deal that will help Kraft trim its debt and extend the North American footprint of Parmalat owner Lactalis. Its shares gained 0.8 per cent in premarket trading.

Colorado voters rejected a measure calling for greater distances between drilling projects and public spaces, which spurred shares of companies operating in the state. Anadarko Petroleum Corp. surged 9.4 per cent, while Noble Energy Inc. jumped 7.3 per cent, making them the top two gainers among S&P companies trading premarket.

U.S. satellite TV service provider Dish Network Corp. reported a 5 per cent decline in quarterly revenue on Wednesday as it leaked more subscribers in the face of cheaper options like Netflix and Hulu. Its shares fell 3.1 per cent in premarket trading.

Papa John’s International Inc. reported a smaller-than-expected decline in quarterly comparable sales in North America, helped by new advertising and rebranding as it tries to recover from bad publicity stemming from an acrimonious split with its founder. The Louisville, Kentucky-based company said it now expects full-year North America comparable sales to decline in the range of 6.5 per cent to 8.5 per cent, compared to a prior outlook for a 7 per cent to 10 per cent decline. Its shares rose 5.3 per cent in premarket trading.

Earnings include: ATS Automation Tooling Systems Inc.; Ag Growth International Inc.; Alcanna Inc.; Allied Properties REIT; Altius Minerals Corp.; Altus Group Ltd.; American Hotel Income Properties LP; Andrew Peller Ltd.; Bird Construction Inc.; Black Diamond Group Ltd.; CGI Group Inc.; Cardinal Energy Ltd.; Cervus Equipment Corp.; Chesswood Group Ltd.; Choice Properties REIT; Corby Spirit and Wine Ltd.; Crombie REIT; Easyhome Ltd.; Endeavour Mining Corp.; Essential Energy Services Ltd.; Firm Capital Mortgage Investment Corp.; First Capital Realty Inc.; Gamehost Inc.; Guardian Capital Group Ltd.; Heroux-Devtek Inc.; Home Capital Group Inc.; IAG Inc.; Ivanhoe Mines Ltd.; Just Energy Group Inc.; Killam Properties REIT; Kinross Gold Corp.; Linamar Corp.; Manulife Financial Corp.; Melcor Developments Ltd.; Pason Systems Inc.; Pollard Banknote Ltd.; Prudential Financial Inc.; Qualcomm Inc.; Rocky Mountain Dealership Inc.; Russel Metals Inc.; Sempra Energy; Silvercorp Metals Inc.; Smart REIT; Square Inc.; Sun Life Financial Inc.; SunOpta Inc.; Superior Plus Corp.; Trilogy International Partners Inc.; Twenty-First Century Fox Inc.; United Corporations Ltd.; Western Forest Products Inc.

Other reading: Wednesday’s small-cap stocks to watch

Economic news

(10 a.m. ET) Canada’s Ivey Purchasing Managers Index for October.

(3 p.m. ET) U.S. consumer credit for September. Consensus is an increase of US$15-billion from August.

With files from Reuters

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