U.S. stocks rose for a third day as investors awaited midterm election results and monitored the selloff in crypto tokens that wiped out more than 10 per cent from the price of Bitcoin. The dollar fell with Treasury yields. 

The S&P 500 closed higher, after earlier wiping out gains that had topped 1 per cent. Sentiment was dented after Bitcoin plunged as the owner of the largest crypto exchange swooped in to buy a smaller rival that ran into liquidity trouble. The yield on two-year Treasuries, more sensitive to Federal Reserve policy changes, shed 6 basis points, while a gauge of the dollar dropped for a third day.

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In postmarket trading, shares in Walt Disney Co. declined after the company reported sales and profit that fell below Wall Street expectations.

Equities gained in the regular session as investors eyed potential gridlock from midterm results. Still, any final outcome may not be known for days or even weeks if races are as close as polls suggest and if losers challenge results.

In an unexpected development, billionaire Changpeng “CZ” Zhao consolidated his position atop the crypto world on Tuesday with a move to take over FTX.com. Terms of the emergency buyout were scant, helping to send prices of cryptocurrencies tumbling after a brief rebound.

“The mini crash in Bitcoin/crypto did destabilize the stock market and cause a sharp drop,” Jay Hatfield of Infrastructure Capital said. “Investors don’t like to see any disruptions or mini crashes in any risk asset.

A history of robust performance following midterm results has helped buoy optimism about the outlook for equity markets. While polls suggest Republicans could make gains, thereby placing a check on Democratic policies, there are multiple scenarios. The best outcome for Treasuries could be a Republican control of both the House of Representatives and Senate, while the dollar could find support should Democrats keep both chambers.

For many the biggest headwind for markets is the Fed’s monetary tightening with Thursday’s consumer-price-index data the next event risk coming on the heels of core consumer prices rising more than forecast to a 40-year high in September. Even if prices begin to moderate, the CPI is far above the Fed’s comfort zone. 

Going forward there may be a silver lining in gridlock for policy makers, according to Art Hogan, chief market strategist at B. Riley Wealth. 

“Divided government, particularly leading into a presidential election, will most likely create a standstill where very little gets done,” Hogan wrote. “That’s probably a good thing for the Fed because various stimuli have not made their work easier.”

More commentary

• “The more and more you just get polls or even some slight acknowledgements from places that the Republicans are probably going to take up at least one chamber of Congress, I think the market is actually seeing that as a good outcome,” Shawn Cruz, head trading strategist at TD Ameritrade, said in an interview. “They actually want a little bit of gridlock out of Washington.”
• “The inflation statistics are going to be more important than the election,” Michael Darda, chief economist at MKM Partners, said on Bloomberg TV. “Inflation will tend to lag the cycle so if you have the Fed chasing down lagging indicators with a very rapid succession of interest rate increases and quantitative tightening, there is a very significant risk that the Fed significantly overshoots neutral.”
• “The gridlock rally is a bit overdone, as we were already there,” said Victoria Greene, G Squared Private Wealth CIO. “Investors will need to temper expectations on results coming in this evening. Many contested races it might be weeks, or god forbid, months before we know results. Politics matters personally, less so to the markets.”

Treasuries gained across the board Tuesday, with the benchmark 10-year rate dropping as much as 9 basis points. Meanwhile, traders shaved bets on rate hikes, with swap markets still leaning toward a 50 basis-point Fed hike in December. More notable moves were further out, with the peak reaching just above 5 per cent in the first half of 2023.

Nvidia Corp. climbed as it began producing a processor for China. Take-Two Interactive Software Inc. fell after reducing its forecast for net bookings.

Europe’s Stoxx 600 rallied, after a weak open. Chinese equities halted a rally as traders considered a jump in virus infections and official comments defending COVID Zero. Oil fell as China’s renewed commitment to strict COVID-19 policies overshadowed a global market backdrop of shrinking fuel inventories.

Key events this week:

• U.S. midterm elections, Tuesday
• EIA oil inventory report, Wednesday
• China aggregate financing, PPI, CPI, money supply, new yuan loans, Wednesday
• U.S. wholesale inventories, MBA mortgage applications, Wednesday
• Fed officials John Williams, Tom Barkin speak at events, Wednesday
• U.S. CPI, US initial jobless claims, Thursday
• Fed officials Lorie Logan, Esther George, Loretta Mester speak at events, Thursday
• U.S. University of Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.6 per cent as of 4 p.m. New York time
• The Nasdaq 100 rose 0.8 per cent
• The Dow Jones Industrial Average rose 1 per cent
• The MSCI World index rose 0.8 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.4 per cent
• The euro rose 0.5 per cent to US$1.0071
• The British pound rose 0.2 per cent to US$1.1536
• The Japanese yen rose 0.7 per cent to 145.63 per dollar

Cryptocurrencies

• Bitcoin fell 12 per cent to US$18,172.17
• Ether fell 17 per cent to US$1,310.88

Bonds

• The yield on 10-year Treasuries declined seven basis points to 4.14 per cent
• Germany’s 10-year yield declined six basis points to 2.28 per cent
• Britain’s 10-year yield declined nine basis points to 3.55 per cent

Commodities

• West Texas Intermediate crude fell 2.8 per cent to US$89.18 a barrel
• Gold futures rose 2.1 per cent to US$1,715.10 an ounce