Global markets endured a volatile start to November, as investors evaluated the results of the US mid-term elections, further movements in oil prices and renewed diplomatic activity.
The US mid-term elections delivered both a Democrat-controlled House of Representatives (254 Democratic seats (with a lead in 7 more) vs. 162 Republican (leading in 12) at the time of writing) and Senate (54 seats vs. 44). Therefore, a Democratic-controlled Congress will operate alongside the existing Republican presidency. Markets initially viewed this outcome cautiously, but subsequently welcomed the likelihood of political gridlock, which could restrict significant changes to taxation, regulation and global policy, all of which have driven global markets in recent years. For example, a divided government may limit further debt-funded spending, while Democratic control of Congress could bring greater scrutiny of AI developments.
As last week progressed, investor sentiment shifted as expectations for a slower AI-buildout hit global equity markets. This added to existing questions regarding the cost and sustainability of development, triggering a sell-off in AI-related stocks on Wall Street that filtered into Asian and European markets. The international impact was evident on Friday as Japan’s Nikkei 225 index fell 6.0%, marking the biggest one-day fall in Japanese stocks since April 2025, while European markets retreated in early trading on Friday.
Brent crude fell from above $110 per barrel to below $95 over the week to Wednesday, as investors reacted positively to the election result and hopes of renewed diplomatic activity. However, Iran and the US – remain some distance from an agreement, and Gulf nations remain prepared for the possibility of further disruption. Brent crude currently trades at the time of writing around $197 per barrel.
US Equity Market:
US equities initially climbed in the aftermath of the election result, with the S&P 500 Index gaining 1.6% last Wednesday, recording its strongest day since August. The rally was supported by reduced political uncertainty following the election, as well as investors adjusting their expectations for lower future oil prices and greater constraints on government spending. However, sharp losses last Thursday reversed Wednesday’s rally. The S&P 500 index fell 4.4%, recording its worst day since ‘Liberation Day’ in April 2025, and the technology-heavy Nasdaq 100 index fell 6.4%. The broader Nasdaq Composite also declined 5.5%, taking it more than 10% below its October record high.
Performance varied significantly between sectors, with banks, retailers, healthcare companies and established tech companies amongst the strongest performers. Of note, Microsoft, Amazon and Apple each rose more than 6% last Wednesday. By contrast, companies most exposed to the construction and operation of AI data centres suffered losses, as the mid-term results altered investor expectations on the speed of the AI build out. Nvidia, for example, fell around 9% last Thursday. These moves compounded what was a difficult end to October for AI-related stocks.
UK Equity Market:
The UK saw a relatively muted political week by comparison, with continued reaction to measures announced in the recent Budget. The government confirmed that preventative public spending – investment measures to address issues before they escalate – will be protected through a new ring-fenced category at the 2027 Spending Review. The approach is intended to safeguard investment in areas such as health and homelessness, where earlier intervention is likely to reduce longer-term public costs
The government also proposed changes to the way private pensions are accessed. Under the “guided retirement” proposals, most defined contribution schemes would be required by the proposed legislation to offer a default option designed to provide regular income during retirement for those that do not wish to be responsible for investing their pension in later life. Around 17 million private-sector workers could be affected by the proposal, though individuals would retain the option to choose alternative arrangements.
The FTSE 100 index initially moved higher over the week to Thursday, in line with the broader post-midterms market rally. However, the index suffered in the global equity sell-off towards the latter end of the week, falling around 1.5% in early trading on Friday, and was marginally down over the week. Sterling currently trades at around $1.34 against the US dollar.
Inflation, Interest Rates and Bond Markets:
Last Thursday, the Bank of England Monetary Policy Committee (MPC) announced the decision to raise the interest rate from 3.75% to 4.00% following an 8-1 vote. The decision marks the first increase since 2023, with tensions in the Middle East and resultant inflation cited as the main driver. The MPC also predicted that the subsequent energy shock could cause inflation to increase to 5% by mid-2027, applying further pressure to the existing cost of living crisis. Notably, Ofgem is due to announce the next energy price cap by 25th November, with British Gas, EDF and E.ON all currently estimating an increase of c.29% in January.
UK and US bond markets responded positively to the US election result, as investors welcomed potential constraints on debt-funded spending. By last Friday morning, 10-year gilt yields had fallen from above 5.4% lthe previous week to around 5.2%, while 10-year US Treasury yields fell from around 5.0% to c.4.9%. Yields remained elevated amid inflation risks, higher energy costs and government borrowing concerns. As a reminder, yields move inversely to prices.
In lower quality corporate credit, riskier sections of the market came under pressure, as higher interest rates and concerns over heavily indebted companies triggered a sharp sell-off.
What’s on the horizon
Investors will continue to focus on the implications of the US mid-term election results for government spending, AI regulation and future policy towards the Middle East. The latter will continue to influence global energy prices.
In terms of macroeconomic data announcements, China released October inflation data today, which will be followed by its trade balance tomorrow. US consumer price inflation is also due tomorrow, and will provide an indication of whether higher energy costs are spreading to other areas of the economy. The UK will release September and Q3 economic growth estimates on Thursday, while Japan’s preliminary third-quarter economic growth estimate is scheduled for Sunday.
This material has been written on behalf of Cambridge Investments Ltd and is for information purposes only and must not be considered as financial advice. We always recommend you seek financial advice before making any financial decision.
Past performance is not a guide to future performance.
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Source of financial market data: MorningstarDirect.