Markets Dropped On The Midterm Projections, Then Turned Around

The Associated Press projected that Democrats won control of both chambers of Congress, and markets moved twice before most Americans woke up: down sharply on the overnight projections, then back up by the opening bell. AMD reported a record quarter and guided to more revenue than Wall Street expected, though its margin forecast came in a little light. China's central bank cut the rate on its stock-purchase loan scheme while official data showed its own investors stepping back.

Fast Facts

• 3M announced a $7.4 billion settlement of injury claims over the PFAS "forever chemicals", an agreement covering up to 120,000 plaintiffs (Read More)
• More than 9,000 drugstores will sit in one company and the Aetna health insurance and pharmacy-benefit operations in another, as CVS Health splits itself in two (Read More)
• Meta is raising $15 billion in a five-part bond sale, borrowing from investors to pay for the artificial-intelligence build-out whose price tag moved markets last month (Read More)
• Revenue at Shopify grew 32% from a year earlier to around $3.7 billion in the third quarter, and the stock fell after the report (Read More)
• Record quarterly revenue sent Super Micro's stock higher, with finance chief Mark Long telling MarketWatch the company is building a "high-quality customer base" (Read More)
• Job openings across the United States rose in September while hiring held relatively steady, according to the Labor Department's monthly survey of openings and turnover (Read More)

Global News

• Novo Nordisk raised its guidance for the year, the Danish drugmaker pointing to an improved outlook for its obesity and diabetes drugs in markets outside the U.S. (Read More)
• New Zealand's unemployment rate climbed to 5.7%, its highest since mid-2015, defying expectations of a fall a week after its central bank held rates on a split vote (Read More)
• India's rupee gained 14 paise to 94.61 against the dollar in early trade as crude prices fell, with the Sensex up 435.10 points (Read More)
• Mitsubishi Corporation posted higher first-half profit on rising revenue and investment gains, and the Japanese conglomerate raised its full-year outlook (Read More)

Markets Fell On The Midterm Projections Overnight, Then Turned Higher Before The Open

The Associated Press projected that Democrats won control of both the House and the Senate in the midterm elections voted on Tuesday, November 3, with Republicans losing Senate seats including in South Carolina, Kansas and Texas. President Trump told The New York Times he was "absolutely willing to accept those results." As of Tuesday's close, the Treasury Department put the 2-year government borrowing rate at 4.61% and the 10-year at 4.95%, each a little higher on the day. A yield is the annual return a bond pays at the price it currently trades for.

The round trip is the story. Overnight, as the projections arrived, Nasdaq and Dow futures fell about 2%, according to Economic Times; futures are contracts that let traders bet on where an index will open while the market itself is still closed, so they are the first read on a surprise. Treasury yields fell too. South Korean and Taiwanese stocks fell, led by chipmakers, and Asian currencies firmed against a weaker dollar. Then it reversed. By Wednesday morning the Wall Street Journal reported U.S. stock futures had turned higher, Treasurys stronger with the 2-year yield at a two-month low, the dollar lower and gold higher. European stock indexes rose. Nasdaq, citing RTTNews, reported Asian stocks ended Wednesday mixed, while the Journal described the intraday turn as an initial selloff giving way to a relief rally. Both are true of different hours of the same day.

Economic Times reported technology stocks and cryptocurrencies fell while solar stocks rose, and said Treasury yields dropped as the prospect of heightened oversight damped hopes for stimulus through government spending and taxes. The same outlet attributed the selling in South Korean and Taiwanese chipmakers to concern about tighter AI regulation and slower spending on data centres. In general, and setting today's move aside, when more buyers want bonds they bid the prices of those bonds up, and a bond's price and its yield move in opposite directions. A rush into bonds therefore shows up on a screen as falling yields.

Two reasons to hold the reaction loosely. The Journal, quoting ING, said the dollar trimmed its initial losses because the new Congress is not seated until January, so nothing in Washington changes for roughly two months. And Nasdaq, citing RTTNews, named uncertainty over technology regulation, trade policy and the U.S. federal budget deficit as still open questions. A projection tells you who holds the majority. It does not tell you what gets written into law.

Sources: Axios · WSJ on futures and Treasurys · WSJ on the two-year yield · WSJ on gold · WSJ on Europe · Economic Times on yields and futures · Economic Times on Asian chipmakers · Economic Times on moves across assets · Nasdaq · U.S. Treasury

AMD's Revenue Forecast Beat Expectations, Its Margin Forecast Missed

AMD, the chip maker that competes with Nvidia and Intel, reported third-quarter results after Tuesday's close, the report yesterday's briefing flagged as the one to watch. Revenue set a company record. The standout line was the data center business, meaning the chips AMD sells to the warehouse-sized buildings full of computers that train and run artificial intelligence, where revenue rose 97% from a year earlier. For the current quarter AMD guided to about $17 billion in revenue, guidance being the company's own forecast of the next three months, and that landed above the consensus estimate, the average of what Wall Street analysts had penciled in. Those analysts had gone in expecting $1.68 in earnings per share against $0.97 a year ago, an expectation rather than a result. The Wall Street Journal reported that the shares rose sharply.

One number in the forecast did fall short, and it is the one worth slowing down for. AMD guided to an adjusted gross margin of 55%, slightly below what analysts expected. Gross margin is the share of every sales dollar a company keeps after paying the cost of making the thing it sold, so 55% means roughly 55 cents of each dollar is left before research, salaries and everything else. Selling much more and keeping a good slice of each sale are two different achievements, and a company can manage one without the other. That is why a forecast can beat on revenue and miss on margin in the same breath: the market prices the two separately.

AMD also projected growth of over 80% in 2027, and MarketWatch read the quarter as evidence of "real" revenue arriving from artificial intelligence rather than promised revenue. The company flagged a constraint alongside that outlook. It is having difficulty sourcing enough high-bandwidth memory, the fast memory chips that sit beside an AI processor and feed it data quickly enough to keep it busy. That is a supply problem rather than a demand problem, and AMD did not tie it to the margin forecast.

Sources: WSJ · Economic Times on the forecast · Economic Times on the quarter and 2027 outlook · MarketWatch · our briefing of November 3

China's Central Bank Cut Its Stock-Loan Rate While New Trading Accounts Fell

The People's Bank of China, the country's central bank, said bank applications under its stock-purchase loan scheme have passed 200 billion yuan. That is what banks applied to borrow, not necessarily what was spent on shares. It also cut the scheme's relending rate, the rate it charges banks that borrow from it, to 1%, part of an effort to support share buybacks (a company buying its own shares back off the market) and steady equity markets. Separate official data measured what investors themselves did. Leveraged traders, the ones who borrow money to buy shares, trimmed their holdings to a one-year low, and new stock-account openings fell more than 30% in October. The South China Morning Post reported that investors in the world's second-largest equity market held off on stocks this week, after the support measures were announced.

Here is the part worth carrying to any market, anywhere. Official support can change how much money is available to buy shares; it cannot by itself change how much anyone wants to buy them. Those are two different quantities, and the numbers above measure one each. The 200 billion yuan is buying power the scheme made available through banks. The one-year low in leveraged positions and the slide in new accounts are measures of appetite. Read a support headline anywhere in the world and the useful question is which of the two it actually moved. The backdrop is a services sector growing at its slowest pace in three months as costs and competition squeezed margins, and Economic Times writes that the weaker Purchasing Managers' Index reading (a monthly survey of business managers, where above 50 means growth) and falling business confidence may weigh on Chinese equities, though export orders keep growing.

Sources: Economic Times on the PBOC loan scheme · Economic Times on the services PMI · South China Morning Post

What To Watch

Reporting today:

• Before the opening bell, McDonald's (MCD) is expected at $3.36 in earnings per share against $3.22 a year ago, Uber (UBER) at $0.94 against $3.11, and CVS Health (CVS) at $1.62 against $1.60.
• After the close, Arm Holdings (ARM) is expected at $0.22 against $0.15 a year ago, Qualcomm (QCOM) at $1.46 against $2.56, McKesson (MCK) at $10.69 and MercadoLibre (MELI) at $9.41. 479 companies are scheduled in all.

Later this week:

• Thursday is the heaviest day at 619 scheduled reporters, with ConocoPhillips (COP) and Sony (SONY) expected before the open and Airbnb (ABNB) and Cloudflare (NET) after the close.
• Friday brings 120, including Berkshire Hathaway (BRK.B), where the average analyst estimate is $5.91 per B share against $6.26 a year ago.
• Federal Reserve Vice Chair for Supervision Michelle Bowman is scheduled to speak on supervision and regulation on Friday. The minutes of the October 27-28 Federal Open Market Committee meeting are due November 18, and the Beige Book on November 25.
• The new Congress is not seated until January, so the questions the projections raise stay open for roughly two months.
• Every earnings figure above is an estimate rather than a result.

The Classroom Takeaway

The same news pushed stock futures down overnight and back up by morning, which is a useful reminder that a market's first reaction and its settled view are different things. Students can follow the yields and indexes that moved on our live market data page.