Nick Spencer-Skeen, Senior Executive Officer, Lunaro Markets Limited
Friday Closing Prices
S&P 500 7,376 (+0.31%)
Nasdaq 24,579 (+1.09%)
Gold $4,069 (-0.43%)
Brent Crude Oil $97.69 (-1.44%)
Tuesday’s US midterm election results rippled through markets this week, with a Democratic sweep of both chambers of Congress triggering a sharp repricing across equities, commodities, and rates1. Fears of tighter regulation of the AI buildout hit technology stocks hardest, with the Nasdaq 100 falling 6.4% on Thursday and wiping a whopping $2.3tn from market capitalisation2. The broad Semiconductor index plunged more than 12%, while the VIX surged 39%2. Friday’s partial rebound offered some relief, although the S&P 500 still recorded its fourth consecutive weekly decline, falling 2.7%2.
Oil suffered an equally dramatic reversal. WTI, trading near $104 a barrel the previous week, collapsed as markets priced a greater likelihood of Middle East de-escalation following the election2. Brent fell over 8% on Wednesday2.
Meanwhile, economic data and Fed commentary reinforced the prospect of further monetary tightening. October payrolls rose 165,000, comfortably exceeding expectations of 65,00010, while the unemployment rate fell to 4.1%3. Fed officials maintained a broadly hawkish tone, with markets now pricing 19bps of tightening at December’s meeting2.
A Political Reckoning
The Democratic Party captured the needed Senate seats to take control, flipping seven Republican-held seats1. This included traditional Republican strongholds such as Texas, Kansas, and South Carolina, while gaining more than 40 House districts1.
The move lower in stocks reflects the worry of greater scrutiny of AI infrastructure, particularly data-centre development and energy consumption4,11. This threatens to complicate an investment cycle already facing questions over financing and returns, hence the wobble.
Another implication traders are still digesting is a substantial weakening of Trump’s legislative authority1. Democratic control introduces greater obstacles to tax reform and fiscal expansion. The risk of budget standoffs also rises, potentially complicating Treasury issuance and fiscal negotiations.
The sharpness of the moves seen even to end the week in stocks, oil and commodities may not have run its course, so the week ahead could bring more volatility for traders to contend with.
The Fed May Not Be Finished
Amidst all of the disorderly price action following the election, chatter from Federal Reserve officials flew under the radar.
However, those who spoke maintained a hawkish tone this week, reinforcing expectations of further interest rate hikes. San Francisco Fed President Daly suggested additional hikes would be necessary, while Cleveland’s Hammack favoured a gradual tightening cycle to prevent inflation expectations becoming entrenched5,6. Musalem highlighted inflationary pressures stemming from AI infrastructure investment and Middle East supply disruptions7.
Friday’s October employment report strengthened their case. As we mentioned in the introduction, the Nonfarm payrolls were very strong, showing a resilient labour market. Such resilience gives policymakers greater latitude to prioritise trying to tackle inflation, leaving the hurdle for pausing the tightening cycle relatively high.
The Next Inflation Test
Tuesday’s US inflation report will provide the next major test for markets, particularly following Friday’s stronger-than-expected payrolls print and increasingly hawkish Fed commentary. Headline Consumer Price Index (CPI) rose 0.6% MoM in September, taking annual inflation to 3.7%, while core prices increased 0.3% MoM, leaving underlying inflation at 2.6% YoY8.
Expectations point to some moderation in October, with headline inflation forecast to rise 0.4% MoM and core CPI by 0.3%9. Attention will centre on whether recent energy price pressures have begun feeding into broader inflation.
For markets, the balance of risks remains uncomfortable. A softer print could provide relief to Treasuries and equities following a volatile week, although resilient employment limits the scope for a sustained dovish repricing. Conversely, another upside surprise would strengthen the case for a December hike. It would also put equity valuations under even more strain.
Economic Calendar
Chart of the Week
