Global stocks recovered on Wednesday from lows hit overnight, while the dollar and oil dipped, after Democrats won control of both the Senate and the House in the US midterm elections, fuelling fears that rapid growth in the artificial intelligence sector 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," said Deborah Cunningham, chief investment officer for global liquidity markets at Federated Hermes.
"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.
Markets rebound after early losses
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 percent, while Europe's STOXX 600, which has acted as a hedge against AI-related risks, jumped 1.4 percent to two-month highs. US stock futures also reversed course to rally around 1 percent, having fallen by as much as 2 percent overnight.
Shares in Elon Musk's Tesla and SpaceX, which he intends to merge, were down around 4.5 percent to 5 percent in premarket trading, compared with rises of 0.8 percent to nearly 3 percent 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," said Kathleen Brooks, research director at XTB.
"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," she said.
The AI boom has driven global markets, leaving investors alert to any threat to its expansion. The election could also reshape US fiscal policy and affect defence, healthcare and banking.
US small-cap futures rose 1.3 percent, while the Mexican peso and Canadian dollar strengthened. Emerging-market bonds also gained, with Ukrainian debt reaching its highest level since September.
Defence stocks fell on both sides of the Atlantic, with BAE Systems down nearly 4 percent and major US arms makers losing up to 2.8 percent.
Investors flock to safe havens
Treasuries rallied as investors expect gridlock in Washington to cut government spending, with AI regulation also possibly slowing growth and reducing the need for interest rate hikes.
The yield on the benchmark US 10-year Treasury note was down 3 basis points on the day at 4.92 percent, having fallen as much as 6 basis points to a low of 4.89 percent 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," said Prashant Newnaha, senior rates strategist at TD Securities in Singapore.
The dollar weakened broadly, leaving the euro up 0.5 percent at $1.125 and the pound up 0.5 percent at $1.349.
The yen and the Swiss franc, both safe-haven currencies, also gained. The Swiss franc was the standout performer, with the dollar down 0.6 percent against it at 0.8163 francs. The dollar also fell 0.4 percent against the Japanese yen to 158.12.
In the oil market, prices were choppy on Wednesday after hitting a four-week low in the previous session, as investors weighed talks to end the wars in Ukraine and Iran against worries that recent attacks in both conflicts could further disrupt supplies. Brent crude was down 0.4 percent on the day at $103.17 a barrel.
