A major political shift in Washington. The US midterm elections have delivered a significant victory for the Democrats, who have regained control of both the House of Representatives and the Senate.
The result fundamentally changes the political balance in Washington for the remaining two years of President Trump's term.
Markets:
Equities: Big swings at the moment strong upmove
Bonds: Government bond yields fell - US 2y yield 4.61%, US 10y yield 4.93%, Japan 10y yield 2.81% - France 10y yield 4.86%
Commodities: Oil prices fall again after yesterday’s stabilization, WTI around USD 94/barrel and Brent around USD 101/barrel;
Precious metals rebound strongly, gold at USD 4’035/oz, silver at USD 52/ozCurrencies: US dollar weakear - Japanese Yen weakens USDJPY 159 - Swiss franc mixed
Cryptos: relief rally - Bitcoin above USD 80k
Volatility: The VIX index falls back significantly to 17 - The window for relatively inexpensive portfolio hedging is again there
My View: Financial markets are reacting with extraordinary volatility, as investors struggle to assess the implications of the election outcome for economic policy, financial markets and the broader investment outlook. The Nasdaq has experienced extraordinary intraday swings, initially falling around 2%, recovering to a 1% gain, slipping back into negative territory and subsequently surging approximately 2% higher.
It seems that investors clearly have different interpretations of the election outcome. Historically, US equity markets have tended to rally in the months following midterm elections. Investors are well aware of this pattern and appear to have positioned themselves accordingly.
For me, the initial reaction looks primarily like a relief rally. One major uncertainty has disappeared, but has it really?
The Democrats' control of Congress introduces a new political dynamic for the remaining two years of President Trump's presidency. While the fundamental direction of US policy may not change dramatically, passing new legislation and advancing the administration's agenda could become considerably more difficult. Political gridlock may initially be welcomed by financial markets, but it does not necessarily mean greater stability or predictability.
More importantly, the fundamental risks I have repeatedly highlighted remain firmly in place: excessive AI investments and valuations, persistent inflation, elevated bond yields, growing consumer financial stress and significant geopolitical uncertainty. None of these risks have disappeared overnight.
I am not chasing today's initial market reaction. The extraordinary price swings demonstrate how divided and fragile market sentiment remains. The sharp decline in the VIX is particularly interesting, potentially offering another opportunity to establish or increase portfolio hedges at attractive levels.
For now, I prefer to observe how markets digest the election outcome and whether the rebound proves sustainable. I am rather pessimistic.
Become a Member to access more valuable market updates like this
