Global stocks, dollar hunker down for U.S. midterm elections

By Marc Jones

LONDON (Reuters) - European shares ticked lower and the dollar and bond markets barely budged on Tuesday, as traders braced for midterm elections in the United States and some potentially lively sessions ahead.

Japan and Hong Kong had helped Asia overcome another Chinese wobble, but Europe slipped into the red early on as investors pounced on some corporate earnings misses and pre-U.S. midterms caution took hold.

The elections mark the first major test of President Donald Trump's sweeping tax cuts and hostile trade policies. Polls point to his Republican party losing control of the House of Representatives which could curb some of his policymaking power.

The dollar dipped against the euro and sterling, but made up ground on the Japanese yen as dealers kept their options open after the U.S. currency's bumper year so far.

"It is definitely not the time to buy the dip," said London & Capital's Chief Investment Officer Pau Morilla-Giner, referring to U.S. and globally-focused stock markets and risk assets.

"Everything that could go well for U.S. consumers in the last couple of years has gone well, but now the tide is turning... At the moment you are running out of drivers of growth in the U.S."

Italian and Spanish stocks weakened as updated PMI figures confirmed euro zone business growth had fallen to a two-year low last month against the backdrop of trade tensions.

The future output index caused even more concern as it fell to a near four-year low of 60.5 from 62.1.

"Euro zone companies reported a disappointing start to the fourth quarter," said Chris Williamson, chief business economist at IHS Markit which compiles the data.

Italian government bond yields were also pushing up after euro zone finance ministers called on Rome to change its budget at a meeting on Monday.

That had done little to ease the standoff between Italy and the European Union over the spending plan. With Rome not likely to bow to the demands any time soon it reignited concerns about a further escalation in the feud.

OIL SPILL

In Asian trading, MSCI's broadest index of Asia-Pacific shares ex-Japan edged up 0.4 percent following a positive finish for Wall Street on Monday.

Japan's Nikkei also climbed 1.1 percent though weaker Chinese markets and regional technology shares capped the region.

Apple suppliers such as Taiwan's Hon Hai Precision Industry were hit by a report that Apple had told its smartphone assemblers to halt plans for additional production lines dedicated to the iPhone XR. The report had also driven Apple shares 2.8 percent lower in U.S. trade.

While political gridlock between the White House and Congress could hinder Trump's pro-business agenda and raise concerns about U.S. political instability, some analysts say this may have already been priced in by investors.

The Cboe Skew index, also known as the "black swan" index, hovered not far from its 2-1/2-year low hit Friday, indicating demand for options that provide protection remains tepid.

A higher skew typically indicates investors are buying more protection on heightened anxiety.

"Unlike the U.S. Presidential election or the U.K.'s Brexit referendum, the upcoming U.S. (midterm) elections are not a binary event," said Yasuo Sakuma, chief investment officer at Libra Investments. "So it's unlikely to send stocks significantly in one direction, apart from initial quick reactions."

Gold was little changed but in oil markets crude prices were near multi-month lows after the United States allowed eight countries to continue buying oil from Iran temporarily, easing the likelihood of a sharp supply drop.

U.S. West Texas Intermediate (WTI) crude futures slipped 0.3 percent to $62.89 a barrel, after hitting a seven-month low of $62.52 on Monday.

Brent crude futures dropped 0.6 percent to $72.74 a barrel, near Friday's 2-1/2-month low of $72.16.

Both oil benchmarks have slid more than 15 percent since hitting four-year highs in early October.

(Additional reporting by Hideyuki Sano and Tomo Uetake in Tokyo; editing by David Stamp)