The Democrats have swept Congress, putting a check on the White House for the next two years. The market’s initial reaction was to sell the AI trade, with Nasdaq 100 futures down as much as 2.4% overnight on fears of regulation and data-centre scrutiny. But by the European morning, futures had recovered it all.
I read the sweep as more positive for bonds than negative for stocks. Gridlock lowers the tail risk of an all-out war with Iran and gives Congress a say on the budget, which pulls inflation expectations and the term premium lower. That is why the long end has led the rally, and why money keeps rotating out of the Magnificent 7 into the rest of the index rather than out of equities.
Discipline still matters. Strikes on Iran have continued this week. The SOFR-EFFR spread has also not normalised after month-end. Today's refunding statement and Friday's payrolls are the next tests for rates.
Earnings are lifting AI hardware, with AMD and Arista both higher after their results, while Apple's margin guide weighed on the stock.
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DISCLAIMER: This newsletter is intended for educational purposes only. Any information or analysis in this note does not constitute an offer to sell or a solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice, nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.
