Today
U.S. and Canadian equity futures are pointing to modest gains this morning ahead of a busy week of earnings and central bank decisions. In Brazil, markets are bracing for a sharp selloff following President Lula da Silva’s surprise re-election victory over Flávio Bolsonaro. Investors had piled into Brazilian assets on expectations of a Bolsonaro victory, viewed as more market-friendly given his promises of fiscal discipline and pro-business reforms. Earnings season continues this week with results from Alphabet, Amazon and Microsoft, providing another test of investor confidence in the AI boom. S&P 500 third-quarter earnings are expected to grow nearly 30% from a year earlier, although much of that growth is concentrated in a handful of companies. Nvidia and Micron alone account for roughly one-third of the total increase, while the top 10 contributors, including Nvidia and Micron, account for two-thirds combined. Excluding those 10 companies, earnings for the rest of the index are still expected to grow a respectable 10%. On the central bank front, both the BoC and Fed announce interest rate decisions on Wednesday. Markets are pricing in an 85% probability that the BoC will raise rates by 25 bps to 2.50%, up from just 35% days ago. The shift followed Governor Macklem’s comments at the IMF’s annual meetings in Bangkok, where he said that higher oil prices could push inflation further above target. However, September CPI was 3.1%, driven by gasoline prices, while the BoC’s preferred core inflation measures remained below 2%, raising questions about whether markets have read too much into his remarks. South of the border, the Fed is expected to hold rates steady, with the probability of a hike falling from 70% following September’s increase to less than 10%, despite stronger than expected inflation. Cautious comments from several Fed officials have also tempered expectations for further tightening.
Big tech litmus test. Tech companies are facing scrutiny ahead of a busy earnings week, as investors prioritize the profitability and cash flow implications of AI spending over strong revenue growth. Alphabet, Microsoft, and Amazon are all expected to report double-digit revenue growth, but concerns over rising capital expenditures have grown following Meta’s share-price decline after it outlined plans to increase future spending commitments by $125 bln to $825 bln. Rising borrowing costs, slowing AI revenue growth, and more reliance on debt financing have weighed on confidence, with estimates that more than $3.5 tln in AI infrastructure investment could face impairment by 2030 if revenues fail to justify expenditures. These concerns have contributed to the Mag Seven’s underperformance this year, with the group gaining 6.5% compared with 11% for the S&P 500, despite expectations for earnings growth of 34% this year and 27% in 2027. Valuations have become more attractive, however, with the Mag Seven trading below 24 times forward earnings versus a 10-year average of 29 times, but investors remain concerned that continued AI investment could continue to pressure free cash flow. Investors will be looking for evidence that AI-related revenue growth can keep pace with rising capital expenditures, as higher spending puts pressure on free cash flow.
Brazilian financial markets are selling off following President Lula’s unexpected reelection victory over market-favoured conservative candidate Flávio Bolsonaro. The win is reversing investor expectations for a shift towards more business-friendly economic policies. Lula secured 51.8% of the runoff vote against Bolsonaro’s 48.2%, triggering significant selling pressure, with a U.S.-listed Brazilian equity ETF falling -26% in premarket trading, a Japanese-listed Brazil ETF declining -15%, and currency derivatives suggesting the real could weaken by more than -10%. Analysts anticipate the benchmark Ibovespa could fall over -10% when local markets open, potentially triggering circuit breakers, while domestic bond yields could rise by 150 to 250 bps as investors reassess Brazil’s fiscal outlook. The selloff reflects the unwinding of bullish positioning built up after Bolsonaro’s first-round lead, when expectations for spending restraint, lower interest rates, and improved investor confidence attracted billions in foreign capital. Brazil’s structural fiscal challenges, including government debt exceeding 80% of GDP, budget deficits, elevated real interest rates, and rising financial distress among households and businesses are all adding to concerns.
Canada-U.S. trade talks appear to be gaining momentum, with White House economic adviser Kevin Hassett suggesting that the two countries are close to reaching an agreement following renewed discussions between Howard Lutnick and Canadian officials. The improved outlook follows the Trump administration’s decision to remove 50% tariffs on certain Canadian products, including plywood, bleached paper, cartons and specialized agricultural machinery, after lobbying by Republican Senator Susan Collins to support businesses in Maine. Mark Carney has reiterated his willingness to negotiate a mutually beneficial agreement, although U.S. officials warn that large differences remain and that Washington expects more concessions before finalizing a deal. The tariff adjustments have large political significance ahead of next week’s U.S. midterm elections, as the administration looks to support Collins in her reelection campaign. And while the resumption of negotiations is seen as a positive, the hope for a comprehensive agreement remains highly uncertain.
BC has elected its first Conservative Party majority in 98 years, marking a significant political shift after Premier David Eby’s decision to call an early election resulted in a defeat for the governing NDP government. With nearly all ballots counted, the Conservatives were leading in 64 of the legislature’s 93 seats, compared with 27 for the NDP and two for the Greens, prompting Eby to announce his resignation and positioning Lorne Doerkson as the province’s next premier. The Conservatives campaigned on reducing taxes, accelerating regulatory approvals, eliminating certain environmental requirements, and improving the province’s fiscal position following five credit-rating downgrades in five years. Their economic agenda prioritizes natural resource development, including a commitment to double BC’s natural gas production by 2032 and expand LNG exports to Asia, aligning with Mark Carney’s efforts to diversify Canadian trade away from the U.S. However, plans to loosen environmental regulations could generate legal challenges, protests, and tensions with Indigenous communities and environmental groups.
Oops. A Republican committee supporting Maine Senator Susan Collins’ reelection campaign spent nearly $25,000 on political advertising in Portland, Oregon, instead of Portland, Maine. This comes amid a closely contested Senate race in Maine. The advertisement targeted Collins’ Democratic challenger, Troy Jackson, criticizing his tax policies and referring to him as “Taxin’ Troy Jackson.” However, the intended audience was on the complete opposite side of the country, over 5,000 kms away. The advertisement was quickly withdrawn, and the political action committee indicated that the mistaken purchase would be refunded.
Diversion:
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