Tokyo, New York. The Democrats' surprisingly great success in the US midterm elections has led to significant price losses in Asia. In the USA, too, the futures of all major indices fell. According to initial forecasts, the Democrats will again hold the majority in the House of Representatives in the future. A majority in the Senate is also considered a given.
A public holiday on Tuesday was also responsible for the strong rash in Japan. The market therefore made up for the sharp price loss of semiconductor and AI stocks on Monday. The US elections also played a role, as market developments showed.
The Tokyo Stock Exchange initially opened slightly in positive territory on Wednesday morning due to unexpectedly good balance sheet figures from the US chip company AMD. After that, however, things fell steeply – driven by a renewed loss of trust in artificial intelligence (AI).
There are also significant losses on the US stock exchanges. The futures of all major indices fell noticeably on election night. On the technology-heavy Nasdaq 100, which had recently slipped into correction territory, the futures signaled losses of over two percent. Futures on the market-wide S&P 500 were down 1.2 percent, while contracts on the Dow Jones lost 0.8 percent. With the exception of the Dow Jones, all major indices closed in positive territory on Tuesday.
A look at previous US midterm elections shows that divided government is a fairly common outcome in US midterms. Since 1990, almost every midterm election in the United States has featured divided power.
And in the past midterm elections, a pattern emerged: before the midterms, the S&P 500 was weaker, but often recovered in the following months. But while the US stock index S&P 500 has risen in 21 of the past 23 midterm elections in a period from a month before the election to two months after, there is likely to be increased volatility on the stock markets initially.
The Democrats' predicted election victory has also had an impact on the US bond market, which has been under pressure for months. In Asian trading, US government bonds fell after the initial results of the midterm elections. The yield on ten-year US bonds fell to 4.901 percent.
Rising US national debt, the prospect of tighter monetary policy and a flood of AI bonds had pushed US bond yields to new decade highs in recent months. The yield on the trend-setting ten-year papers had climbed to over five percent in mid-September. After the recent stock market turbulence, investors have recently increasingly turned to debt securities that are considered safe.
The reason why yields are now falling is because a Democratic victory could lead to relief on the bond market. According to the British bank Barclays, a divided government with a Republican president and a Democratic Congress makes the government's expansionary fiscal policy more difficult. That could limit U.S. borrowing, whose total debt burden has climbed past $40 trillion this year.
“A divided government simply means less government spending than in recent years,” Brij Khurana, portfolio manager at Wellington Management, told Bloomberg. “Historically, divided government has typically been pretty good for Treasury bonds.”
Experts at Deutsche Bank recently pointed out that what matters is whether compromises are possible between the parties. Without an agreement, government spending could remain unchanged in the next few years. But if bipartisan agreements are reached, spending could continue to rise, similar to Trump's first term. After Democrats won the majority in the House of Representatives in the 2018 midterm elections, spending increased by around eight percent in the following fiscal year. If debt continues to rise, this could also keep the risk premium high.
Microsoft shares fell by 1.9 percent on election night, Meta fell by around two percent, and Oracle lost around four percent after the trading session. Google parent company Alphabet was two percent lower. Just last week, the company destroyed $500 billion in market value in one day.
The reason for the losses: During the election campaign, residents' resistance to the construction of AI data centers increased in many places, and Democrats in particular took up the demand. This concern was particularly reflected in the stock prices of companies related to AI and the semiconductor industry.
In Asia, the memory chip manufacturer Kioxia lost 11.6 percent of its value by midday in Japan, while the tech investor Softbank, one of OpenAI's major investors, fell by 9.0 percent. The two South Korean market leaders in RAM for AI applications also continued their share price decline. The SK Hynix share price, which started the trading day with price gains, fell by 6.2 percent by midday, while Samsung Electronics was 4.1 percent lower.
Tuesday's election in the US set the stage for AI regulation at the local and state levels. Since there is still no uniform regulation at the national level, regional legislation is becoming the focus.
On Tuesday there were more than 40 referendums on the construction and operation of data centers in several states, 21 of them in Ohio alone. This involves limit values that must be adhered to, such as water or electricity consumption. In some cases, however, it involves complete construction bans and operational halts. The Democrats' clear victory could mean significantly stricter requirements for companies and the industry.
However, some experts have doubts as to whether the momentum against data centers will continue after the election. Shortly before the election, Goldman Sachs wrote in an analysis that interest in data centers could decline after the election on Tuesday.
And according to DWS analyst Peter Doralt, investors also need to look at the other side of the coin: “If AI increases productivity more broadly, these economic impacts could be more important for stock valuations than the political debate over data centers.”
Bitcoin reacted to a possible victory for the Democrats in Congress with slight price losses on election night. The world's oldest cryptocurrency fell 0.6 percent to $76,382. During the election campaign, the industry primarily supported Republican candidates from whom it had hoped for crypto-friendly regulation.
In Ohio, one of the contested Senate seats, Democrat Sherrod Brown, a well-known critic of the industry, will instead move into the Senate. Crypto companies such as Coinbase and Ripple had spent $55 million to prevent Brown from entering the Senate.
On the foreign exchange market, the greenback lost slightly against the euro. The dollar fell by 0.6 percent and was quoted at 0.89 euros. A Democratic-led Congress that curbs budget spending could further push down US government bond yields - and, in the opinion of experts, thus weaken the dollar's interest rate advantage.
