Equity markets initially rallied, then fell heavily, after the Democrats flipped both the House and Senate in the US midterms.
The S&P finished the week down 2.7% while the Nasdaq lost 3.4%. Losses were steeper in Asia; Japan, Taiwan and Korea were all down 9-12%.
In contrast, Australia was a relative and absolute standout, with the S&P/ASX300 up 1.4%.
Tech (-7%) and energy (-12%) stocks drove the decline in the US.
Brent crude oil fell 16%, gold rose 5%, bonds rallied on haven demand (US 10-year yields -5bps) while credit spreads widened with the yield on CoreWeave bonds rising by about 1% to about 16%.
Huge volatility saw big unwinds of growth and momentum trades, with significant hedge fund de-grossing exacerbating moves.
It’s been a challenging couple of months for hedge funds. A number were said to be returning capital last week.
Attempts were made to offload datacentre loans – ING was reported to be selling a US$500 million portfolio.
Consumer, real estate and healthcare stocks gained in the US on the midterms result.
Australia, which has at times been the source of funding for other markets, was the relative and absolute outperformer, with tech (+8.8%) benefitting from the sharp move higher in NextDC following the investment by Goodman Group and Digital Realty.
Energy stocks and most major mining companies fell (similar to the US), but real estate, consumer and gold stocks rose.
The RBA hiked, as expected, but a more dovish outlook drove down future hike expectations. Most economists now predict the RBA is done.
Expectations for a US Federal Reserve hike next month rose 5% to about 78%.
In terms of currencies, Australia was again standout, though the AUD was the worst-performing major currency after the RBA move, dropping 2.3%. The USD was little changed, up 0.4%.
US midterms
Broadly speaking, here are the key trends:
Leaving aside the politics, the outcome of the midterms was significant.
1. Exacerbation of pre-existing concerns around the AI trade
Fears over a clamp-down on data-centre development drove tech stocks lower. Concern centred on Texas, where the incoming Democrat governor has called for an immediate moratorium on development. About 30-40% of proposed US data-centre developments are planned in the State, so the disruption has the potential to be significant. For context, Jefferies has cut its forecast for total US capacity additions by 8% over 2026-2030.
2. Emphasis on voter concern around the Iran conflict and cost of living
Expectation for an Iran resolution rose, which saw oil sell off. There was renewed speculation over tariff changes, particularly given the Democrat majority in the Senate gives them a stronger voice on trade, notably around the US-Mexico-Canada free-trade agreement. However, control still rests with the Executive.
3. Spending
Healthcare and real-estate stocks benefitted from a belief that more support will be forthcoming. On the flipside, the outlook for US debt arguably worsened. This is a tailwind for gold, albeit its move higher was more a function of the drop in oil.
4. Grift
Democrats are reportedly planning on investigating several of the administration’s deals. Who this ultimately affects is unclear, but there are risks for the mining sector given the significant number of critical minerals deals.
It is important not to overstate the potential impact here.
Many of these issues have been apparent for some time. Changes at the state level may be significant, but at the federal level the ability to enact change without executive support is limited.
US macro and policy
Expectations for a December rate hike jumped around during the week, before Friday’s labour market data saw them rise 5% higher to 78%.
Despite that, longer term expectations fell.
Labour market data was a clean sweep for the hawks on monetary policy. October nonfarm payrolls rose 165k (versus 70k expected), with August and September both revised higher.
The unemployment rate dropped to 4.1% (versus 4.2% expected) and average hourly earnings rose 0.4% month/month (versus 0.3% expected).
Combined, the data appears to clear the way for a December hike, though consumer price index (CPI) data tomorrow will also be key.
While inflation is still rising (potentially peaking in December), inflation expectations are falling, with the University of Michigan 1-year inflation expectations down 0.4% to 4.3% (versus 4.6% expected) and 5-10 year expectations 0.1% lower to 3.4% (versus 3.5% expected).
Importantly, credit conditions also continue to tighten, particularly for the tech sector.
As a case in point, Meta sold US$25bn in bonds on Tuesday, i.e. just before the Thursday’s tech selloff. Their notes due in 2056 priced at a yield premium of 2.2% above Treasuries, ~0.9% wider than a comparable note sold in April.
Australia macro & policy
The RBA hiked as expected after the deputy governor’s hawkish comments last month. But a 6-3 voting split resulted in a more dovish interpretation that was further boosted by edits to the policy statement.
In her speech, Governor Michelle Bullock noted higher inflation was now “baked in” to forecasts for next year, implying the bar for a further hike was higher.
This was further reinforced by the policy statement dropping the wording “including increasing the case rate target further if needed”.
The statement also said earlier rate hikes “have tightened financial conditions” and “the economy is slowing, housing price have fallen significantly, and the unemployment rate has risen”.
Taken together, the consensus view is that the tightening cycle is over – though we’ve seen previous predictions prove premature.
This view is reflected in implied rates, which have shifted lower. Markets are now pricing in >50% chance of a cut by this time next year.
The knock-on impact was that the AUD was the worst-performing major currency last week, ending down 2.4% against the USD.
That isn’t helpful for the outlook for inflation.
The reason given for the three dissenting votes was potential downside risk given housing market weakness, an unemployment rate drifting up and no sign of accelerating wage growth – all in response to previous rate rises. Hence there was an argument to wait for more data.
Perhaps more importantly, in the past 12 months there have now been five rate hikes.
Per the RBA, the impact of the last two (May, September) are yet to flow through, thus now was “probably” a good point to take stock.
The RBA now sees Australian CPI peaking at 4.5% in Q4, declining to 2.7% next year.
The Reserve revised up unemployment rate expectations from 4.5% this quarter to 4.7%. End 2027 unemployment is seen at 4.9% and end 2028 at 5.1%.
The drop in oil prices last week provided a further tailwind to the RBA’s dovish tilt.
Brent fell 16% to US$98/bbl which, while still above the Q2 and Q3 average, represents a material drop. The RBA sees the Middle East conflict as a key inflation driver.
Consumer and real-estate stocks rallied on the perceived RBA pivot (and household spending actually rose 0.6% month/month in September versus 0.0% prior and 0.2% expected). But caution is still warranted given the coming months will “feel like a recession”.
As we heard from the banks last week, stress is appearing in customer cash flows, with a jump in watchlist loans prompting NAB to lift collective provisions.
David Jones entering into administration is also a timely reminder of retail challenges.
Commodities
The midterms had a meaningful impact on commodities with oil the standout, down 16%, on hope anti-war election sentiment translates to a normalisation of flows through the Strait of Hormuz.
Positively, Australian fuel stocks remain healthy. Diesel inventory stands at 31 days, jet fuel at 28 days and petrol 41 days.
Gold, which for much of this year has traded as the inverse of oil, rose 5%, also benefitting from its safe-haven status.
The new US Congress will be sworn in on January 3, while the US is likely to hit its US$41.1 trillion debt ceiling in February.
It’s worth noting that gold price rose 12% and 17% in the three months prior to debt ceilings in 2011 and 2023.
Copper has been a clear beneficiary of data centre spending, even if modest in terms of actual demand, and fell 4%. It is now just shy of its 200-day moving average.
Uranium, rare earth and spodumene prices were little changed, with Democrat control of Congress unlikely to translate to material policy changes in the near-term.
There was renewed speculation of potential tariff changes given cost-of-living concerns in the election, but U.S aluminium premiums actual rose 3% during the week.
Day-to-day control of tariffs remains with the Executive, although Democrat control of the Senate does give them a stronger voice on trade, particularly around the U.S-Mexico-Canada free trade agreement.
Iron ore rose 2%, with sentiment gradually improving as we enter a seasonally stronger period. The risk of supply cuts – either driven by current low prices or by disruption from the impasse between Fortescue and China Mineral Resources – also pose a potential tailwind.
Markets
US stocks staged a slight comeback after Thursday’s crash, with some trading desks and strategists calling it a bottoming-out post-washout.
However, the rebound was modest, with sentiment still fragile given on-going concerns around capex, funding and the data centre build out.
Any further drop in oil and/or bond yields could help, but the likely Fed hike in December still looms.
Ultimately, sentiment around AI-related stocks is likely to continue to dominate, which means the near-term focus will be on results from the likes of CoreWeave and Nebius, as well as any news on the Anthropic IPO – where the implied valuation fell US$300bn last week.
Looking further out, the likelihood is inflation peaks in December, which means the Fed hike, if taken, could look like a policy mistake.
That risks exacerbating a slowdown, particularly if AI sentiment sours further. In that deflation-esque scenario, cyclical assets could suffer and defensives outperform, unless or until the Fed pivots.
In Australia, tech and consumer stocks led gains, with NextDC (NXT, +77.2%) the standout. Gold, consumer and property stocks also rose, while energy and utilities fell.
Financials underperformed, with the results from National Australia Bank (NAB, -3.6%) and Westpac (WBC, +0.6%) driving small earnings downgrades.
IMPORTANT INFORMATION: This document has been prepared by Enhance Financial Partners, ABN 45 146 707 173 AFSL 515518, based on our understanding of the relevant legislation at the time of writing. While every care has been taken, Enhance Financial Partners makes no representations as to the accuracy or completeness of the contents. The information is of a general nature only and has been prepared without consideration of your individual objectives, financial situation or needs. Before making any decisions, you should consider the appropriateness for your personal investment objectives, financial situation or individual needs. We recommend you see a financial adviser, registered tax agent or legal adviser before making any decisions based on this information.