A bolt from the blue

• India and China equities added +9.15% and +5.64%, respectively
• UK equities held up relatively well in risk-off markets, slipping -0.55%; UK small-caps and mid-caps were positive, climbing +0.76% and +0.72%, respectively
• Gold advanced +5.03% in dollar terms

• Korea, Japan and emerging market equities slid -15.18%, -7.24% and -3.82%, respectively
• World growth equities fell -3.17%, with US equities tumbling -2.53%
• Brent crude oil fell -13.32% in dollar terms

(All equity data is MSCI; all bond data uses ICE Bank of America indices unless otherwise stated; all data in sterling unless otherwise stated)

Democrats trounced Republicans in the US midterm elections last week, wresting control of the House and Senate, triggering a sell-off in stocks exposed to Artificial Intelligence (AI) infrastructure. The tech-heavy Nasdaq fell around 5.5%, and the S&P 500 4.5%, before recovering somewhat, as investors fretted about whether a phase of hyper-growth in data centres is over, given that the Democrats campaigned on tighter controls. The backlash may be overdone, but local moratoria reflect voters’ apparent rejection of ever-more data centres in their own backyards. Longstanding concerns about the valuations, earnings and funding of AI companies also helped to catalyse the sell-off. News that tech giant Nvidia is investigating CEO Jensen Huang over a reported affair with an alleged Chinese spy added to investors’ edginess.

President Trump had put affordability front-and-centre of his MAGA campaign, but the Iran war helped to push grocery, gasoline and mortgage costs higher. Voters ultimately cared more about their own living standards than an unpopular foreign war. 

In a risk-off mood, investors bought US Treasuries, causing the 10-year yield to fall by some eight basis points to 4.84%. (Prices are inversely correlated to yields.) The US dollar index – which measures the greenback against a basket of major currencies – rallied at one point by around 1%. Although Brent crude oil falling to nearer $90 per barrel, the lowest level since August, appeared to be due to Senate Democratic leader Schumer vowing to end the Iran war, flows through the Strait of Hormuz had already been returning to near pre-conflict levels before the election. Equity market volatility spiked.

It remains to be seen whether an enfeebled Trump could now attempt regime change in Iran, but it seems unlikely. As a clearing event, the post-election period may be pivotal for the Iran war, the US’s approach to President Putin and the Russia-Ukraine war, impacting energy and therefore inflation. The Democrats may also attempt to overhaul US tariffs. From a fiscal perspective, the deficit won’t be improved, but Trump’s loss means that another tax give-away – perhaps through a One Big Beautiful Bill II or a $5,000 cheque for every Republican voter – can’t now happen. Investors will continue to run their slide-rule over the election’s impact on different industries, such as med-tech, healthcare and financials. 

The Bank of England (BoE) raised its benchmark interest rate by 0.25% to 4.0% – its first increase since 2023 – and signalled another may be ahead due to growing concerns about inflation. Policymakers highlighted the ongoing rise in global energy prices, mostly driven by instability in the Middle East, as a key threat to UK inflation which is now expected to climb toward 5% in the first quarter next year, well above their 2% target. Despite higher prices, the rate increase comes against a backdrop of stronger-than-expected economic activity, with the BoE now forecasting 1.6% growth this year and 1.3% in 2027.

The Monetary Policy Committee approved the vote by an 8-1 majority, with one dissenter pushing for a larger 0.5% increase. BoE governor Andrew Bailey suggested that we should expect another rate hike soon – perhaps in December or in February, depending on energy prices – but that moves should not be interpreted as the start of a new hiking cycle.

For households and businesses, the rate increase is likely to raise borrowing costs, especially hitting variable-rate mortgages and short-term loans. However, savers may benefit from higher deposit rates. The yield on a two-year UK gilt, usually quite sensitive to interest rate moves, rose to 4.77%. Despite the rate increase, sterling weakened a little against the dollar during a bout of tech-led equity market volatility. 

The US economy added 165,000 jobs in October, comfortably ahead of consensus expectations of around 70,000, with previously reported gains for August and September also revised up. With the unemployment rate edging down to 4.1%, the data imply that the US labour market remains resilient despite higher interest rates. Job creation also extended beyond the healthcare sector which had been accounting for the bulk of recent gains. And average hourly earnings increased 0.4% on the month and 3.1% annually. 

For the US Federal Reserve (Fed), the report could complicate efforts to fight inflation. A stronger labour market can sustain consumer demand and wage pressures, potentially increasing the likelihood that policymakers maintain a restrictive monetary stance. The Fed will be weighing up whether to hike interest rates again in December, after the first rise in three years in September. However, the tightening of financial conditions since the summer could see labour demand cool next year in any case, with payroll and unemployment numbers tending to lag interest rate changes. Expectations of a December rate hike nevertheless edged slightly higher following the jobs report, although the odds of further hikes in 2027 had fallen somewhat after the midterm election result triggered a tech-stock sell-off.

• UK and EU agree to remove post-Brexit checks on food and agriculture exports – the government expects this phase of its ‘Brexit reset’ may eventually benefit the UK economy by £5.1bn a year
• Eurozone’s inflation rose to 4% in October – preliminary estimates showed inflation at its highest level since September 2023, driven by higher energy prices due to the Iran war. The energy component rose 20.8%, its highest level since late 2022
• France’s National Assembly rejects proposed 2027 budget – Prime Minister Sebastien Lecornu’s plan to calm bond markets and deliver a sweep of spending cuts to reduce the country’s deficit was unsuccessful last week. Like last year, the French government may use Article 49.3, which isn’t uncommon for hung parliaments, to push through the budget without a vote
• Bank of Japan remains open to further interest rate hikes – minutes from central bankers’ September meeting showed their openness to further rate increases, with one member favouring a faster pace should prices remain elevated
• Japan Tobacco’s Russian assets seized – amid escalating tensions between Moscow and Tokyo, President Putin reportedly ordered the seizure of assets belonging to Japan Tobacco Inc., Russia’s largest cigarette manufacturer. The move may have been retaliation for Japan’s sanctions on several Russian individuals and companies last month, targeting the country’s energy export revenue
• India under pressure to cut long-term capital gains tax for foreign investors – the Securities and Exchange Board of India, alongside other industry bodies, called for the government to abolish the 12.5% effective rate. India’s equity market has stagnated in recent years, prompting foreign investor outflows of an estimated $30bn so far in 2026
• Anthropic pledged to spend $895bn on AI infrastructure – investing mostly in computing and data centres, the investment is seven times the amount of cash held by the company. Concerns around profitability resurfaced as the latest filing reported an operating loss of $567m, one quarter on from its first operating profit of $974m

Disclaimer

Past performance is not a reliable indicator of future returns. Nothing herein should be construed as a recommendation to hold, buy or sell any security or encourage any investment decision. The mention of any particular asset class, sub-asset class or company does not imply that it is held, or may ever be held, in any product or service.