Equity markets turned out to be the main beneficiary from the historic US Democratic sweep

Markets

Equity markets turned out to be the main beneficiary from the historic US Democratic sweep on both sides of US Congress. They secured comfortable majorities, enabling them to put the breaks on US President Trump’s erratic policy. European stock markets rallied up to 2% with gains in the US ranging between +1.44% (Nasdaq) and +3% (Dow Jones). The AI and energy sectors were notable underperformers as several Democrats campaigned on slowing down the AI-infrastructure build-out. The US administration from the beginning of Trump’s term has been very regulatory-friendly. US Treasuries extended their recent rally as Democratic control over Congress is also expected to slow down deficit-spending and thus reduce the risk of public finances continuing to deteriorate at their current pace. Daily changes on the US curve ranged between -4.9 bps (2-yr) and -7.8 bps (7-yr) with the belly of the curve outperforming the wings. A lower US real rate (currently 2.6% from peak just below 3% around one month ago) is accompanied by sliding inflation expectations thanks to this week’s moves on energy markets. Brent crude prices shed $10 on the day, falling from $104/b to $94/b as the Democratic sweep is seen as further boosting a return to diplomacy and shying away from military action. After all, “the reason we lost (the midterms) is the war” as per US vice—president JD Vance. European gas prices fell from €94/MWh to currently €85. Lower energy prices and the broad risk rally supported the single currency with EUR/USD retaking the 1.12-handle and extending the positive momentum this morning. The pair seems ready to take a run at the previous YtD low which now serves as technical resistance at 1.1325. Yesterday’s October EMU CPI figures in the meantime bolster the case for a December ECB rate hike with the current headline and core CPI pace (4% & 2.5%) unlikely to ease in coming months.

Apart from more US midterms repositioning, today’s agenda features policy rate decisions in Norway (stable), the Czech Republic (25 bps rate hike) and the UK. The Bank of England is expected to lift its policy rate the first time this year. From a market point of view, the main question is whether they’ll push back against current future tightening bets embedded in money markets (at least another 50 bps cumulative after today). If that’s not the case, GBP can extend its winning streak, pushing for new highs against the euro. The ECB’s annual money markets forum could be interesting as well with ECB President Lagarde amongst featured speakers.

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The Brazilian central bank kept the policy rate unchanged at 13.75% yesterday, snapping a streak of five consecutive 25 bps rate cuts. The central bank speaks of a “challenging scenario” for monetary policy, referring to but not explicitly mentioning the election shocker of last month. Incumbent president Lula pulled off the unexpected by winning the run-off vs Bolsonaro (junior) despite having lost the first round. It triggered a huge repricing in markets with stocks, the currency and bonds slumping. The central bank said that uncertainty surrounding the reference scenario increased significantly and sees inflation expectations moving further away from target as a more pronounced deceleration of domestic activity is taking place. It raised the inflation forecast for 2027 to 4.7% from 3.9%, compared to the 3% +/- 1.5 ppt target. That should ease to 3.5% in 2028Q2, currently the monetary- policy relevant time horizon. It issued no guidance other than the need for serenity and cautiousness in its conduct. Neither of the three asset classes mentioned above have recovered even a bit from the post-election hit. USD/BRL trades around 5.46 compared to <5 before the vote. Losses in the Ibovespa stock index accumulated to more than 18% and government bond yields are between 200 and 250 bps higher.

The National Bank of Poland met yesterday under a cloud of political and institutional uncertainty. Rates were left steady at 3.75%. The status quo was widely expected and, in any case, cemented by sub-par inflation figures last week. New forecasts put annual inflation for this year at 3.1% (from 2.8% previously), 4.2% for 2027 (vs 2.7%) and 2.9% for 2028 (vs 2.3%). Growth would check in at around 3.7%-2.8%-2.8%, showing some small changes (0.1-0.2 ppt) compared to earlier forecasts. The central bank ties future decisions to the macroeconomic situation abroad (including geopolitics and commodity prices) as well as to the shape of domestic fiscal policy, energy price-related regulation and changes in economic and wage growth. Polish money markets assume at least one hike to 4% in the near-term. The zloty strengthened yesterday in a move shared by CE peers amid lower energy prices and broad risk- on that followed the US democratic sweep. EUR/PLN retreated from three-year highs around 4.41 to 4.38.

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