US midterms: four market impacts

Good afternoon. This is your midday market update from City AM.

Markets have begun digesting the news of the major midterm victory for the Democrats, a result that will impede Trump’s power in the White House and put a number of big businesses on high alert.

Here’s a round-up of four consequences for the market from today’s election results.

Defence stocks across Europe have suffered significant sell-offs. London-listed firms have fallen as much as six per cent this morning as investors weigh the prospects of Trump getting boxed in over military action and deficit-funded defence spending.

That may be a bit of an overreaction by the market, argues Michael Field, chief European equity strategist at Morningstar.

“The fears around the impact on European defence stocks are fair, but we still see significant value in the sector and believe the structural drivers underpinning higher defence spending and the requirement to restock by European nations are still being underappreciated by the market,” Field said.

Fewer world leaders have been more bullish on AI than Donald Trump, who has gone as far as to call worries over AI safety a ‘hoax’.

The US electorate does not have quite the same level of enthusiasm. The Democrats were able to secure victory in Texas for the first time in more than three decades by tapping into concern over AI and data centres.

As part of her campaign, Democratic governor Gina Hinojosa called for an immediate moratorium on data centre development, a wildly popular pledge.

AI and hyperscaler firms are now facing a worst-case scenario: curbs on development and much tighter regulatory scrutiny.

“The scale of the swing in this election may see Democratic ambitions in Congress grow,” said Lizzy Galbraith, Political Economist at Aberdeen.

“Attempts to pass legislation introducing greater federal oversight of AI and the data centre build out are likely.

“Greater change to the policy landscape for data centres, potentially including the rollback of tax credits and less permissive planning laws, is possible given the broad Democratic victories.”

US ten-year treasury yields slipped as much as five basis points as markets bet on political paralysis paring back government deficits.

But this does not translate into an improved inflation outlook, says Charu Chanana, chief investment strategist at Saxo. 

“A reduced probability of additional deficit-financed stimulus could lower expectations for Treasury issuance and long-term borrowing needs relative to the previous policy path. This helps explain why Treasury yields have declined as the election results emerged.

“However, weaker fiscal stimulus does not automatically mean lower inflation. Tariffs, energy prices, wages and supply constraints could continue to exert pressure.”

Just as much as the AI world counted Trump as a close ally, so too did the Bitcoin world.

Donald Trump pardoned a host of high-profile crypto figures during his first year in office, and pushed for a softening of regulations. The Democrats are unlikely to further that agenda.

The price of Bitcoin slid around $1,800 to $76,000 overnight, but has since more than recovered those losses. More choppiness could be on the cards in the weeks and months ahead.

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