Market update: Three things to watch on Tuesday

The focus on Tuesday is the Midterm elections in the US. The mood is cautious as we lead up to the vote. European stock markets still have an advantage over the US, which remain under pressure. US stocks fell at the start of November and futures markets are pointing to a modest open for the Nasdaq later today. 

Below, are three events to watch: 

1. The rise in the Oil price and Midterms 

News that the US struck Iran ahead of the Midterm elections has shaken traders. The strikes, which were limited, according to reports, struck the Strait of Hormuz, but apparently are not a resumption of military activities. This has halted Monday’s decline in the oil price and Brent crude is back above $106 per barrel and is higher by 2% so far today. 

Strikes on Iran suggest that a resolution of the crisis remains far from reach. Iranian officials have said that diplomatic efforts are ongoing, but the prospect of a deal is nowhere near. Anyone who had hoped that the structural premium attached to the oil price would be whittled away in the coming weeks, and the oil price could fall below $100 per barrel, will be disappointed. 

These headlines will keep the oil price elevated, and any resumption of attacks after the Midterm elections could add to upward pressure on an already elevated oil price.

The polls continue to suggest that it will be a clean sweep for the Democrats tonight, and they will win control of both houses of Congress. Essentially this means gridlock for US politics for the next two years. This is good news for stocks, which tend to rally in the year after an election, but it also means that any attempt by Democrats to bring the war to an end and reduce pressure on the oil price, could be vetoed by the President. 

Price action in the oil market in the last 24 hours suggests that the oil price will remain elevated for the medium term. 

2. Still waiting for a recovery in  the AI trade 

After a promising start on Monday, AI-linked stocks faltered once more and the Nasdaq closed lower on the first day of November trading. Investors are cautious even though US economic fundamentals remain solid. For example, the ISM manufacturing survey for October was stronger than expected, and the services survey, scheduled for release later this week, is also expected to remain elevated. 

However, the tech sell off may not be over, and market sentiment remains fragile. For an AI recovery to be in place we need to see a bounce back in one of the main pillars of the AI trade: semiconductors. The Philadelphia Semiconductor Index slumped another 3% on Monday. Chipmakers have been the backbone of the AI rally, and while they continue to slump it is hard to see a deeper recovery in the AI trade taking place. 

We will get an update on chip demand this evening when AMD reports results. AMD’s share price fell 7% on Monday, but it is clawing back 2% in premarket trading. While AMD is expected to post strong results for last quarter and confirm that demand is robust, this may not be enough to stymie a further sell off. Investors are clearly losing patience with the AI capex narrative and are looking for the payoff. Chip makers like AMD have been the chief beneficiaries of the hyperscaler capex binge. As investors turn away from this narrative, they are in the cross hairs. 

With the hyperscalers generally failing to convince the market that AI infrastructure is worth it, the AI trade continues to stumble, regardless of strong demand for chips. 

It is worth noting that markets are primed to rally after this US election, however, this may not turbo charge the AI trade. Instead, it could stimulate other sectors of the market.  The S&P 500 and the Dow have all outperformed the Nasdaq in recent weeks and may continue to do so as we move through November. 

3. Apple

Apple is set to slump on Tuesday and is currently down more than 3% in the premarket. Apple reported strong results, but the market is not impressed, although the stock price has clawed back some earlier losses on Tuesday morning. Its results confirmed how strong the Apple ecosystem is right now, however, AI is starting to have an effect on Apple’s bottom line. 

Investors are concerned about Siri AI and how Apple will charge for this feature. Added to this, memory chips are eating into Apple’s projections for profit margins, which is a turn off for investors in the current environment. 

Although current quarter revenues are expected to be extremely strong, the market is focused on the weaker margin forecasts and this is what is anchoring the market response on Tuesday.

Overall, it could be a quiet session on Tuesday as we await results from the US Midterms. Once this election is out of the way, we will need to see if seasonal strength and post-election euphoria can come out on top against fragile investor sentiment and skepticism over the AI trade.