Wall Street went to bed thinking the AI trade had steadied. It woke up to a blue wave. As the US midterm results rolled in overnight, projections pointed to Democrats taking both the House and the Senate, and the market’s reaction was swift: Nasdaq 100 futures dropped about 1.6 per cent, Tokyo’s Nikkei sank more than 4 per cent and the dollar slid. For London traders the question this morning is whether a change in Washington’s balance of power is a genuine reason to reprice technology, or a nervous first reaction that fades once the dust settles.
The 60-Second Market View
Tuesday’s US session was calm, almost relaxed. The S&P 500 rose 0.36 per cent to 7,568.92 and the Nasdaq Composite gained 0.83 per cent to 25,372, a decent bounce after Monday’s chip sell-off. The Dow slipped 0.38 per cent to 51,786.72. AMD then beat expectations after the close, with data centre sales almost doubling, and Arista Networks reported its fastest revenue growth since listing in 2014.
None of that survived the election count. S&P 500 futures are down close to 1 per cent and Nasdaq futures around 1.6 per cent. The dollar index has fallen 0.4 per cent to about 101.5, sterling has climbed to roughly $1.346, the yen has strengthened and gold is up about 0.6 per cent. Brent crude has eased to near $103. The FTSE 100 lost 1.14 per cent yesterday to 10,638.43, so London starts on the back foot, although its light exposure to technology may again be a cushion.
What Happened Overnight?
Asia took the brunt. Japan’s Nikkei fell 4.2 per cent to around 60,440, hit by a double blow: technology shares tracked US futures lower, and a stronger yen made life harder for the country’s big exporters. South Korea’s KOSPI dropped another 3.75 per cent after Tuesday’s 4 per cent slide, and Taiwan lost about 2 per cent. Australia fell almost 1 per cent. Hong Kong and Shanghai were flat, and India edged higher.
On the election itself, early calls showed Democrats flipping Senate seats in states that had been reliably Republican, including North Carolina and South Carolina, and projections from US networks pointed to control of both chambers. Final counts in some races will take time, so the exact margins are still moving. What matters for markets is the direction: Congress now looks likely to sit in opposition to the White House for the next two years.
The Big Story: Why a Blue Wave Hits Tech First
The logic traders are applying is straightforward. A Democratic Congress is seen as more likely to push for higher corporate taxes, tougher rules on big technology and closer scrutiny of AI spending, and less likely to pass the kind of tax cuts that flatter company profits. Bank of America’s Michael Hartnett had warned before the vote that a Democratic sweep could knock US stocks 10 per cent or more. JPMorgan was far calmer, expecting only a small move either way.
The reason the reaction is so sharp is positioning. Technology already makes up a huge share of the US market, and it has been wobbling for weeks over whether the biggest companies are spending too much on data centres. When a market is that crowded, it does not need a disaster to fall. It just needs a fresh reason for doubt, and an unexpectedly decisive election result is exactly that.
The weaker dollar is the second-order piece worth noticing. Investors seem to be betting that a divided Washington means less government spending and more gridlock, which could mean slower growth and, eventually, lower interest rates. That pushes money towards gold and towards currencies such as sterling, the euro and the yen. A stronger yen in turn hurts Japanese exporters, which helps explain why Tokyo fell so much harder than Hong Kong.
There is a sensible counter-argument. A Congress and a White House pulling in different directions usually means less gets done, not more, and history shows US shares have tended to rise in the year after midterm elections. Any big tax or regulation changes would need the president’s signature, which is unlikely. That is why the first move may prove too big. The test is whether US buyers treat the open as a chance to sell more, or a chance to pick up quality names at a discount.
FX
The dollar is the main mover. Sterling has gained about 0.35 per cent to around $1.3458 and the euro is up by a similar amount to $1.1233. The yen has firmed to about 157.8 per dollar, which takes some pressure off Tokyo’s officials after weeks of intervention worries. Against the euro, sterling is flat near 83.5 pence, a sign that this is a dollar story rather than a pound story. The Bank of England meets tomorrow, so sterling traders will be careful not to get too far ahead of that decision.
Equities
Expect technology-heavy markets to open under pressure, with European chip equipment makers the obvious target after Asia’s session. The FTSE 100’s mix of banks, energy, miners and consumer staples should hold up better than the Nasdaq-style indices, although a weaker dollar is a small headwind for London-listed companies that earn in dollars. In the US, the contrast between strong results from AMD and Arista and falling futures is the clearest sign of how much politics is driving the tape this morning.
Bonds
US Treasury yields have edged lower, with the 10-year at about 4.93 per cent and the two-year near 4.59 per cent, consistent with the idea of slower growth and less fiscal stimulus under a split government. UK 10-year gilt yields ended yesterday around 5.25 per cent. With the Bank of England deciding on rates tomorrow, gilts will take more of their direction from oil and from Threadneedle Street than from Washington.
Commodities
Brent crude is down about 0.75 per cent near $102.80 a barrel, and US crude is around $95. That is a little surprising given the news from the Gulf: Iran rejected the latest US proposal in the Qatar-mediated talks, and a tanker was hit by two projectiles near the Strait of Hormuz late on Tuesday, though no one was hurt and no oil spilled. The market appears to be weighing slower US growth more heavily than the risk to supply for now. Gold has climbed about 0.6 per cent to near $3,960 an ounce on the weaker dollar, while copper fell 1.4 per cent alongside the slide in Asian industrial and technology shares.
Crypto
Bitcoin is slightly lower at about $77,300. It has been trading in step with technology shares rather than acting as a safe haven, so it is moving with the Nasdaq rather than with gold this morning.
Today’s Economic Calendar
09:00 GMT: Eurozone final services PMI. Why traders should care: it shows whether Europe’s service sector is holding up while energy prices stay high.
09:30 GMT: UK final services PMI. Why traders should care: the last read on British business activity before tomorrow’s Bank of England decision.
13:15 GMT: US ADP employment report. Why traders should care: a first look at private-sector hiring ahead of Friday’s official payrolls figures.
15:00 GMT: US ISM services index. Why traders should care: services make up most of the US economy, and its prices measure feeds straight into the inflation debate.
15:30 GMT: US weekly crude oil inventories. Why traders should care: with Brent so sensitive to Gulf headlines, stockpile data adds or removes pressure on prices.
After the US close: Arm Holdings results. Why traders should care: another test of whether strong AI numbers can still lift chip shares in a nervous market.
Levels Traders Are Watching
These are reference points, not predictions. On the S&P 500, 7,500 is the round number in play, with futures already trading just above it. For the FTSE 100, whether it can hold 10,600 after yesterday’s drop is the near-term marker. Sterling around $1.35 is the next obvious line after this morning’s move. Gold near $4,000 is the big psychological figure, and for Brent, $100 remains the line between a market that believes the Gulf will calm down and one that does not.
Where This Leaves Us
The cleaner read is that the market is pricing political risk on top of an already nervous technology trade, and the first reaction tends to be the loudest. The evidence for that is the size of the futures drop compared with the strength of the overnight company results, a weaker dollar and firmer gold that point to repositioning rather than panic, and a Hong Kong market that barely moved. Divided government has usually been a reason for markets to relax, not to run.
That view would change if the US open brings a second wave of selling that spreads beyond technology into banks and industrials, if Treasury yields rise rather than fall because investors start to worry about policy clashes and debt, or if the Gulf flares up enough to push Brent back above $110. The markets worth watching today are Nasdaq futures, the dollar index, gold, sterling ahead of the Bank of England and the Nikkei’s response on Thursday. The opportunity for patient traders is that sharp political sell-offs often overshoot what the policy changes can actually deliver. The risk is that this result becomes the excuse a crowded trade was waiting for. For beginners, the lesson is that elections move markets through expectations, and what the market thought would happen matters as much as the result itself.
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