S&P 500 and Dow Jones Rally After US Midterm Results, Nasdaq 100 Lags

The Bluenami

Market participants digested the US Midterm election results, widely described as a ‘Bluenami’. Let’s face it, it was nothing short of a resounding Democratic victory – a sweep of both chambers that has left President Trump facing a divided and opposing Congress.

My view is that markets are turning a blind eye to the broader political upheaval and instead betting that a firmer hand on data-centre building might stop them from burning cash, given that we now essentially have a divided government. They see this new reality as a legislative standstill: any aggressive legislation passed by the new Democratic majorities will face a swift veto from Trump.

Equities: A Rotation, Not a Broad Tech Bid

Cross-asset performance saw equities and bonds catch a rather weighty bid, with the Dow leading the pack, up an eye-popping 3% on the day. I admit I expected more downside in equities after the results regarding concerns about the AI trade. And it looked like that would be the case before the European cash open yesterday, though that was swiftly reversed (check the M5 chart of any major US stock index, and you will see what I mean).

However, the rally was not a broad tech bid; the Nasdaq 100, while positive yesterday, underperformed, rallying only 0.9%, and the Philadelphia Semiconductor Index (SOX) dropped 3%.

I will say this: While I will be the first to say history can never guarantee future performance, studies by JP Morgan suggest that since the 1950s, the S&P 500 has delivered positive returns in the year following each Midterm election. Time will tell how this plays out, but for now, I remain bullish on equities.

Oil Taking a Hammering

In the commodities complex, oil benchmarks took an absolute hammering, with Brent crude down for a third consecutive session. The unit tunneled through US$100/barrel and is now on the doorstep of its 200-day SMA around US$92.93.

For me, this sell-off feels a bit overstretched, and investors may be getting a bit ahead of themselves about the election results and what they mean for Iran.

BoE Expected to Hike

The day ahead will include an update from the BoE, widely tipped to raise the bank rate by 25 bps from 3.75% to 4.00%. Markets are assigning a 96% probability of a rate increase, and 54 of 63 economists polled by Reuters agree. The MPC vote split is expected to be 7-2, with Alan Taylor and Swati Dhingra likely dissenting.

With the Fed and ECB both having tightened, a BoE hold risks a weaker GBP as rate differentials narrow, importing inflation through energy and goods priced in USD and threatening the expectations anchor the BoE cares about. A hike, therefore, will likely be seen as insurance against second-round risks rather than a response to domestic demand.

For this meeting, with a hike baked in, guidance about future policy tightening and the MPC vote split will be the core focus. A 6-3 split, and hints of a pause, would be a dovish hike, potentially weighing on the GBP and underpinning the FTSE 100. A 7-2 vote, accompanied by wait-and-see guidance, is unlikely to offer much tradable volatility, as it’s the base case.

Written by FP Markets Chief Market Analyst, Aaron Hill