The U.S. midterm elections yesterday delivered victory to Democrats as the GOP lost its majority in both chambers of the legislature. Markets have responded swiftly to these results, but it is still early days to tell what the long term effects of Congress in the control of Democrats with a Republican White House will be for markets.
As results showed how strongly Democrats had performed, U.S. bonds rallied. This suggests that investors feel that with Democrats controlling the House and Senate, Trump will not have free rein to spend federal dollars as he wishes. The curbs on his spending could ease some pressure on the fiscal situation of the country, and that has, at least for now, raised confidence in U.S. bonds.
The 10-year bond yield fell 4.7 basis points to 4.91%. Yields on bonds running for two years shed 3.7 basis points and now carry a yield of 4.59%. The USD has also given up some of its recent gains, shedding half a percentage point.
Investment banker Oliver Faizallah says investors in bonds are largely looking at what these election results mean for United States borrowing. Right now, these results suggest that fiscal expansion is unlikely to happen on the scale that has been witnessed in the two years leading to the polls.
Faizallah however cautions that the polls alone won’t determine how bond yields pan out over the coming months and years. Rather, the Fed, inflation and economic growth would continue to exert influence on bond yields.
The AI industry has been particularly sensitive to the outcome of the midterms. Democrats aren’t as willing to give the industry a free pass as Republicans have been doing, so this outcome could have serious implications for the industry. For example, Republican Greg Abbott lost to Democrat Gina Hinojosa in the governor’s race in Texas. Hinojosa has previously called for imposing a moratorium on constructing data centers in Texas until “proper” regulations are in place on their energy and water use.
Now that she has won the gubernatorial election, data center build-outs in the state could face further delays or even cancellations. Several other states could also take this same road, and federal action may also not be as accommodating as has been the case, if the Democrats have their way.
Analysts say the dollar hasn’t fallen as much as it would have fallen had the president contested the midterm results. His acceptance of those outcomes has removed a big threat that would have dealt the dollar a much bigger blow.
It remains to be seen how the shares of AI hyperscalers like Meta Platforms Inc. (NASDAQ: META) will perform over the coming days as markets get a more clear picture of the implications of these elections.
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