Oil drops as US midterm caution prevails

European stocks edged down on Monday after Friday’s tech rout, with investors looking ahead to Apple’s earnings and taking comfort from a sharp fall in oil prices amid hopes for a deal to end the Iran war.

Markets face a pivotal week, with investors digesting the Federal Reserve's and the European Central Bank’s latest policy decisions, earnings season in full swing and the US midterm elections on Tuesday.

Euro zone government bonds were slightly lower after last week's rally, while investor sentiment remained fragile amid concerns over France's fiscal outlook and continuing street unrest.

MSCI's main world stocks index was roughly unchanged, while Europe's STOXX 600 was down 0.10%, with tech stocks rising 0.30%.

Nasdaq futures climbed 0.73% and S&P 500 futures increased 0.42%. The S&P 500 index fell 1.82% on Friday, while the Nasdaq tumbled 2.86%.

Brent crude futures fell 4.5% to about $108 as Iranian negotiators have left talks with Qatari mediators and a draft proposal is being circulated with a follow-up meeting possible. US President Donald Trump recently threatened new attacks against Iran.

Investors remain cautious ahead of the US vote, with European stock markets facing a different set of challenges from their US counterparts.

"Further expected downside for the euro area PMI is a drag on our Stoxx 600 forecast trajectory," wrote Sebastian Raedler, head of European equity strategy at BofA.

"However, the main reason for our caution on European equities is the risk of disappointment in the AI capex cycle as AI models commodities and competitive moats prove limited."

While earnings outlooks remained in focus, investors expect US equities to come under pressure in the event of a Democratic sweep, as markets price in the risk of higher corporate taxes and tighter AI regulation.

Opinion polls suggest Democrats are favored to win the House, while the Senate remains too close to call, leaving the party well short of a veto-proof two-thirds majority.

"The combination of deteriorating cash flows and rising capital commitments means the debate over whether AI returns can ultimately justify the scale of investment may not be resolved anytime soon," Emmanuel Cau, head of European equity strategy at Barclays, said.

Apple will face scrutiny over three key issues: its crucial holiday-quarter outlook, CEO remarks on AI and the revamped Siri, and rising memory-chip costs that analysts expect to drag quarterly profit growth to its weakest in six quarters.

Goldman Sachs analysts expect capital spending by hyperscalers to nearly double to $800 billion this year and rise further to $1.2 trillion in 2027. At the same time, they see S&P 500 earnings per share growth slowing to 18% next year from nearly 30% in 2026.

"The next phase will be less about identifying who is exposed to AI and more about distinguishing who is already converting that demand into cash, who is still funding the build-out, and what valuation investors are being asked to pay for each," Kristofer Barrett, head of global equities at Carmignac, said.

US dollar safe-haven status under scrutiny

In foreign exchange markets, major currencies were largely subdued. The euro rose 0.46% to $1.1199, while the dollar was up 0.16% at 157.90 yen JPY=EBS.

Rising oil prices tend to hurt the euro and yen as they worsen the outlook for energy-importing economies.

Investors are also questioning the dollar's safe-haven status, concerned that a renewed tech-driven market selloff could weaken the US currency.

George Saravelos, global head of forex strategy at Deutsche Bank, said the US's reliance on foreign equity inflows was historically unprecedented and evidence showed that when the source of an equity shock is US-centric the dollar-equity correlation flips to positive.

Among central banks meeting this week, markets are pricing in rate increases from the Reserve Bank of Australia, Bank of England and Riksbank, while the Norges Bank is seen on hold.

Data due this week include the US ISM manufacturing survey for October later on Monday and the closely watched non-farm payrolls report on Friday. — Reuters