Behind this round of market trends characterized by a "first collapse, then recovery," there is a rational return to normal after the market rapidly repricesthe political landscape. Trump's veto power constitutes a form of mutual checks and balances, and a policy deadlock is the most likely outcome, which has helped to calm panic. However, election-driven market fluctuations have historically been short-lived. The AI theme and geopolitical developments are the core factors driving the market towards the end of the year.

The Democratic Party achieved a historic sweep in the U.S. midterms, not only regaining control of both the House and Senate but also making unexpected turnarounds in traditional Republican strongholds such as Texas, South Carolina, and Kansas. This outcome reshaped market expectations regarding the U.S. fiscal path, AI regulatory prospects, and interest rate trends, leading to a dramatic re-pricing of global asset prices.

The global market experienced a typical "all bad news is out" scenario. Nasdaq 100 index futures tumbled by more than 2%, S&P 500 futures fell by over 1%, and the VIX Panic Index futures broke through the 20 mark; subsequently, the balance of power shifted between bulls and bears, and U.S. stock futures gradually narrowed their losses. The South Korean Composite Stock Price Index turned from a 4% decline to a rise, gold once again surpassed the $4,000 mark, silver also strengthened, and U.S. Treasuries saw gains across the board.

The core logic behind this reversal lies in Trump's veto power. With Democrats controlling both houses of Congress, their agenda for fiscal expansion and tax cuts is hindered, which reduces the pressure on federal borrowing and is beneficial for U.S. Treasurys. However, Trump still holds the presidential veto power, and the market soon realized that the Democrats' ability to pass legislation is also limited, essentially leading to a policy deadlock. This alleviated panic among investors. As Stifel, the chief Washington policy strategist for Brian Gardner, pointed out in a previous research report: "The market's instinctive reaction was a reversal, because investors realized that in either case, a policy deadlock was the most likely outcome."

The degree of surprise exceeded expectations, and the market's first reaction was to sell off.

Before the election, the prediction platform Kalshi had priced the probability of the Democrats regaining control of the House of Representatives at around 99%, and the probability for the Senate was also close to 100%. As a result, contract prices related to Democratic victories soared to 77%. In a report in the early hours of election day, Goldman Sachs clearly stated that the outcome of the House of Representatives had already been factored into by the market, and the outcome of the Senate was seen as the main source of potential surprises.

However, the aspect of the final result that exceeded expectations was not in the House of Representatives, but rather in the significant shift in the Senate and the comprehensive breakthroughs in state-level elections.

The Democratic Party has successively won in districts in Texas, South Carolina, Kansas, Iowa, and other states that were previously considered Republican strongholds. Goldman Sachs political economist Alec Phillips had previously warned that in states with a stronger Republican傾向, Republican candidates historically performed about 3 percentage points better in the end than the polls indicated. However, the actual results show that this "poll buffer" did not materialize this time.

The first reaction of the market was to sell off risky assets. S&P 500 futures fell by about 0.9%, NASDAQ 100 index futures fell by 2%, Bloomberg Dollar Spot Index fell by 0.4%, the Japanese yen appreciated against the US dollar by 0.5%, and the Swiss franc had the largest gain among G10 currencies, rising by 0.7%. Asian stock markets tumbled overall, with the Nikkei 225 index falling by more than 4% at one point, and the South Korean Composite Stock Price Index's decline also expanding to 4%.

Veto power logic takes effect, and selling pressure is quickly absorbed.

As the market begins to understand the practical implications of the decentralized landscape, the initial panic gradually subsides. The key point is that while the Democratic Party's control of Congress can hinder Trump's legislative agenda, it also prevents them from actively implementing their own policies—Trump's veto power constitutes a form of mutual checks and balances.

Invesco Asset Management Global Market Strategist Tomo Kinoshita stated in a comment based on Bloomberg that the regulatory concerns triggered by the Democratic Party's sweeping victory "seem to be a bit of an overreaction. Even if the next Congress passes a bill to tighten AI regulations, President Trump can still exercise his veto power."

J.P. Morgan Asset Management The Chief Market Strategist for the Asia-Pacific region, Tai Hui, also pointed out that Trump still holds the key policy tools such as trade and tariffs, foreign policy, and the current regulatory framework, and that the impact of a decentralized government on his actual governance capabilities is limited. Monex Group Expert Director Jesper Koll went even further to say: "This is essentially a strong presidential system that operates relying on executive orders. Congress may change its stance, but Trump's style of governance will not change."

This logical judgment prompted the Korean Composite Stock Price Index to turn from decline to rise, and the Nikkei 225 Index and the Taiwan Weighted Index in China also significantly narrowed their declines, while the decline in U.S. stock futures gradually reduced.

U.S. Treasury bonds strengthen, and expectations of fiscal tightening are being re-priced.

A decentralized government poses a direct benefit to U.S. Treasury bonds. The market logic is clear: With Democrats controlling Congress, Trump's legislative space to expand the deficit will be limited, reducing the federal borrowing pressure, which is a clear positive signal for the current U.S. Treasury debt of about $40 trillion.

U.S. Treasury yield curve moves lower across the board. The yield on five-year Treasurys fell by 9 basis points to 4.68%, and the yield on ten-year Treasurys dropped by 7 basis points to 4.89%, before both narrowed later on.

Wellington Management Portfolio Manager Brij Khurana According to Bloomberg, "A decentralized government means that high levels of fiscal spending in recent years will be constrained. Historically, a decentralized government structure has generally been favorable for U.S. Treasurys." Andrew Ticehurst, a senior interest rate strategist at Nomura Securities in Sydney, also pointed out that the Blue Wave scenario "is generally considered bearish on the dollar and bullish on U.S. Treasurys, and the market trend in Asia in the early session is consistent with this judgment."

However, strategists from Sumitomo Mitsui Bank, Evelyne Gomez - Liechti, have previously warned against overemphasizing the narrative that "a stalemate equals fiscal tightening." Trump is adept at negotiating compromises, and there is a possibility that the increase in defense spending could offset the effects of healthcare cutbacks, meaning that the actual fiscal trajectory may not change significantly.

AI and Tech Stocks: Shaded by Regulatory Overhang, but Suspicions of Overreaction Remain Unresolved

Technology and the AI sector were the areas that faced the most pressure during this election cycle. The Democratic Party's sweeping victory sparked concerns about stricter data center construction approvals and the advancement of AI regulatory legislation. Coupled with the ongoing controversy over the returns on AI infrastructure investments in the preceding weeks, NASDAQ experienced the largest decline among the major indices.

Asian tech stocks were significantly affected. South Korean Samsung Electronics and SK Hynix both fell by about 1%. According to Jake Dollarhide, the CEO of Longbow Asset Management, Reuters reported that the Democratic Party's sweeping victory "may put pressure on the tech sector and impose regulatory constraints on AI-related fields, which could slow down the rapid growth we have come to take for granted in our daily lives."

Saxo, the Chief Investment Strategist, also pointed out that the decline in NASDAQ futures was even more significant, "reflecting market concerns that the transfer of political power will lead to stricter regulatory scrutiny of AI and large technology companies, while current investors are already skeptical about high valuations and the continuously rising AI expenditures."

However, several strategists have questioned the extent of panic. Jesper Koll made it clear that the negative trend of AI "has nothing to do with whether the Republicans can retain their majority seats," and the criticism and concerns regarding AI "have gone far beyond the political realm." State Street Global Advisors's chief investment strategist, Michael Arone, told Reuters bluntly: "I believe the real risk facing the market is not the blue wave itself, but rather investors' overreaction to it."

Gold strengthens, while clean energy surges against the trend

While the stock market and technology sectors are under pressure, the gold and clean energy sectors have shown distinctly different trends.

Gold prices rose by more than 2%, breaking through the $4,000 mark again. The weakening of the US dollar and the decline in US Treasury yields provided dual support for gold prices. At the same time, the market is betting that a decentralized government will limit Trump's fiscal expansion, thereby alleviating inflation expectations and the risks of fiscal deficits.

The clean energy sector became the biggest structural beneficiary in this selection process.

The market bets that Democratic control of Congress will prevent or partially reverse a series of Trump's measures targeting clean energy projects. In South Korea, Hanwha Solutions once rose by more than 22%, while HD Hyundai Energy Solutions and OCI Holdings each rose by more than 12%. On the U.S. stock market, according to an alternative trading system Blue Ocean, Enphase Energy and SolarEdge Technologies each rose by about 12%, and First Solar and Sunrun rose by 11% and 8.7% respectively.

Whether the market can clear up from this situation depends on subsequent variables.

Behind this market trend of "first collapse, then recovery" is a rational return to normal after the market quickly re-priced the political landscape. The core question raised by Goldman Sachs in its morning report on election day – whether the election could become a "clearing event that would drive a broader risk reconstruction in the stock market" – has received a partial affirmative answer in the short term.

Edward Jones Senior Strategist Angelo Kourkafas According to MarketWatch, election-driven market fluctuations have historically been of limited duration. AI The thematic trends and geopolitical developments are the core factors driving market movements towards the end of the year.

Natixis The chief U.S. economist, Christopher Hodge, also pointed out that the direct economic impact of the election results is "actually not significant." What is more noteworthy is the policy space Trump may have to "change the narrative" after the mid-term elections.

Key observation points for the subsequent market include: the impact of the U.S. Treasury Department's quarterly treasury bond issuance plan on the yield curve, changes in the actual progress of AI data center construction at the state level, and whether the Trump administration will be able to maintain its core policy agenda through administrative means under a decentralized governance structure.

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