Democratic sweep rattles the AI trade

Preview: Democratic Midterm wins hit stocks and the Dollar overnight, with eurozone CPI and US ISM services due today.

Equity markets on the back foot

European traders are waking up to a notably risk-off environment this morning, with the US Midterms dominating overnight news. 

Regional equity indices in Asia are down across the board, and European and US stock index futures are also in the red, as of writing. The core point is that Democrats have been called winners in both chambers, with 54 Senate and 223 House seats called so far, and markets view this as negative for the AI trade. 

In my view, markets tend to lean toward a divided government, given fewer new policy changes, which, of course, means less uncertainty for investors. The concern is clearly on the regulatory side of things and what it might mean for AI.

Japan’s Nikkei 225 is down about 3% and is fast closing in on bear market territory – I am closely watching key support around 58,000. South Korea’s KOSPI flipped from gains to being down around 1%. Frankly, we entered the Midterms with a somewhat fragile equities space. The Nasdaq 100 entered correction territory for a third time this year on Tuesday amid concerns over AI spending and whether it will pay off, and the election results amplify things.

Bonds, FX and commodities

In fixed income, the curve is quiet this morning. We did initially see the benchmark US 10-year Treasury yield clock a low of 4.9%, before modestly recovering some of the lost ground. For now, I see Treasuries remaining bid on the basis that a divided Washington could cap further spending and tax cuts, reducing bond issuance.

FX shows the USD index modestly in the red this morning, down 0.4% and hitting lows of 101.73 – its lowest since late September. Safe havens were bid – USD/JPY sold off from the underside of its 200-day SMA at ¥158.62, with USD/CHF also nudging under daily support from CHF 0.82 the figure.

For oil, price action has been choppy of late, with yesterday’s session culminating in clear-cut indecision candles off 50-day SMAs for both WTI and Brent at US$86.70 and US$103.19, respectively. Naturally, commodity traders are trying to balance talks of ending the war in the Middle East and Ukraine against concerns about further supply disruption.

Data ahead: Eurozone CPI and US ISM in focus

The data docket today welcomes the October eurozone CPI inflation report at 10 am GMT, followed by the October US ISM services PMI at 3 pm.

For eurozone CPI, analysts expect the YY headline figure to reach 4%, up from 3.8% (max/min estimate range between 4.3% and 3.7%), with YY core forecast to remain steady at 2.5% (max/min estimate range between 2.6% and 2.2%). While this may jolt the euro, my history with this release suggests it will offer little tradable volatility. An ECB hike is also largely priced in for December (71%); therefore, a hot reading will only reaffirm this.

For the US ISM services number, this could be potentially market-moving. Economists are anticipating a reasonably flat print at 54.8 in the headline, down from 54.9 in September, with a forecast range of 53.0 to 56.3. In my view, however, the headline matters less than the subcomponents; I will focus on prices paid, particularly given the rates market pricing in a 77% chance of a Fed rate hike in December.

Higher prices paid and employment numbers would likely add fuel to the noted Fed pricing and lift the USD ahead of Friday’s non-farm payrolls reading. However, USD longs are still moderately stretched, and given Fed pricing, a miss in the data (prices paid and employment lower) could generate more tradable volatility than a beat.