Canada’s main stock index opened higher on Wednesday, driven by gains in energy and technology shares.
The Toronto Stock Exchange’s S&P/TSX Composite index was up 77.83 points, or 0.51 per cent, at 15,370.54.
U.S. stocks opened higher on Wednesday after the midterm elections handed Democrats the House of Representatives and saw Republicans reinforce their control of the Senate in a widely expected outcome.
The Dow Jones Industrial Average rose 153.45 points, or 0.60 per cent, at the open to 25,788.46. The S&P 500 opened higher by 18.68 points, or 0.68 per cent, at 2,774.13. The Nasdaq Composite gained 70.13 points, or 0.95 per cent, to 7,446.09 at the opening bell.
A Democrat-controlled House will hamper President Donald Trump’s pro-business agenda, 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.
“A lot of what was holding the market back was fear of what might happen, and the fact that it’s over now will eliminate a lot of it,” said Brad McMillan, chief investment officer for Commonwealth Financial in Waltham, Massachusetts.
“I don’t think the markets were expecting more in the way of future policy action. They are more relieved that anything negative is likely to be a burden.”
Following a steep selloff in October, the S&P 500 remains down more than 5 per cent from its record high, with many investors worried the market could fall further as inflation gathers steam and the Federal Reserve raises interest rates.
The Fed starts its two-day monetary policy meeting on Wednesday, where it is expected to keep interest rates unchanged, but a rate hike in December is largely priced in.
“The policy path implied by this outcome shifts the narrative away from rising rates at least temporarily,” Morgan Stanley’s Michael Zezas wrote in a client note.
“In the near term, that could alleviate the pressure that stocks have felt in recent weeks.”
Investors are also focused on healthcare stocks, one of the best performing S&P sectors this year, with the election results seen as reducing the chances of legislative action to cut medical costs.
Colorado voters rejected a measure calling for greater distances between drilling projects and public spaces, which spurred shares of companies operating in the state.
After volatile Asian trade, where stocks and the dollar swung on the Republicans’ fluctuating prospects, a pan-European stocks benchmark jumped 0.9 per cent while MSCI’s world equity index was up 0.4 per cent, its seventh straight day of gains. Riskier European bonds such as those from Italy also were in demand, with yields falling 6-9 basis points.
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 Fed is expected to signal this week that an interest rate rise remains on the agenda for December.
“Certainly it is now unlikely we will see additional fiscal stimulus in the near-term, that’s a profound change but there will be no repeal of what’s already in place,” Miller said.
That view pushed the dollar 0.5 per cent lower against a basket of currencies though it clawed back some earlier losses.
Ten-year U.S. Treasury bond yields fell to a low of 3.176 per cent as it became clear that more fiscal stimulus was unlikely.
An initial knee-jerk rise to 3.25 per cent came after early reports of a better-than-expected performance by the Republicans, but that move soon fizzled as results trickled in.
“Democrats winning the House is likely to mean slightly less fiscal stimulus going forward. The bond market may take that well because the Federal Reserve will have less work to do,” said Richard Buxton, head of UK equities at Merian Global Investors.
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.
Chinese shares closed 0.7 per cent lower, while Hong Kong markets ended just above flat.
“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.
Oil rebounded to $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 91 cents to $73.04 a barrel. The contract hit $71.18 on Tuesday, its lowest since Aug. 16. U.S. crude rose 58 cents to $62.79.
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.
A ministerial committee of some Organization of the Petroleum Exporting Countries members and allies, including Russia and Saudi Arabia, is due to meet on Sunday in Abu Dhabi to discuss the market and outlook for 2019.
Any return to limiting supply would follow a June decision by the OPEC-led group to relax output curbs in place since 2017, after pressure from U.S. President Donald Trump to cool prices and make up for losses from Iran.