Global stocks rally after Democrats' US midterm win, AI fears hit Tesla
Global stocks recovered on Wednesday after Democrats won control of the US Senate and House, fuelling fears of tighter AI regulation. The dollar dipped against safe-haven currencies, while bonds gained as investors anticipated gridlock in Washington.
Global stocks recovered on Wednesday from lows hit overnight, while the dollar dipped, after Democrats won control of both the Senate and the House in the US midterm elections, a result that has fuelled fears that rapid AI sector growth could be hamstrung by regulatory scrutiny.
In a major setback to President Donald Trump, Democrats scored sweeping victories in Republican strongholds for the first time in generations. The breadth of the party's success was underscored by gains in districts long considered safely conservative, highlighting a political shift that may have caught some investors off guard.
“Democrats pulled off a double victory in the US midterm elections that few saw coming at the onset of the year. The blue wave means the federal government is sure to be divided on most issues,” Deborah Cunningham, chief investment officer, global liquidity markets at Federated Hermes, said. “That typically creates a blockade against new legislation — an environment which broad financial markets traditionally view favourably as variables decrease.”
Opinion polls have shown Democratic voters favouring more control over AI, and investors expect the Democratic-controlled Congress to apply more scrutiny to the sector. AI stocks in Asia initially led the decline in equity markets, while bonds and safe-haven currencies such as the Swiss franc gained. By the time the bulk of the midterm results had filtered through in the European day, equities had turned higher. MSCI's All-World index was up 0.3 per cent, while Europe's STOXX 600, which has acted as a hedge against AI-related risks, jumped 1.4 per cent to two-month highs. US stock futures also reversed course to rally around 1 per cent, having fallen by as much as 2 per cent overnight.
Shares in Elon Musk's Tesla and SpaceX, which he intends to merge, were down around 4.5 per cent to 5 per cent in premarket trading, compared with rises of 0.8 per cent to nearly 3 per cent for other Big Tech stocks. “Overall, these results have had a mild impact on markets so far. Investors will move on from trading the uncertainty of the election results to trading the reality of what they mean for policy,” XTB research director Kathleen Brooks said. “This is bad news for Tesla and SpaceX on Wednesday, but the semiconductor names, the backbone of the AI trade, could brush off concerns about AI regulation and continue to move higher after Tuesday’s stunning rally for the sector.”
The AI boom has helped propel global markets in recent years, driven by heavy spending from tech giants racing to build data centres and expand computing capacity. That has made investors acutely sensitive to anything that could derail the technology's rapid expansion. The election outcome could also hold broad implications for the US fiscal outlook as well as sectors such as defence, healthcare and banking.
Treasuries rallied as investors expect gridlock in Washington to cut government spending, with AI regulation also possibly slowing growth and reducing the need for rate hikes. The yield on the benchmark US 10-year Treasury note was down 3 basis points on the day at 4.92 per cent, having fallen as much as 6 bps to a low of 4.89 per cent overnight, which, in turn, weighed on the dollar. “Bonds are coming out as the clear winner as markets put the AI trade on the chopping block and embrace the higher possibility that further tax cuts are put on ice and government spending slows,” Prashant Newnaha, senior rates strategist at TD Securities in Singapore, said.