Better news for defensive sectors as AI fears gather pace
AI-exposed shares endured significant declines last week as fears about tighter regulation of the industry following the Democrat win in the midterms, added to existing worries about AI infrastructure spending. Underwinding of risk positions and margin calls within hedge funds also added pressure. Energy stocks though, suffered even larger falls as oil prices plunged with markets pricing in a lower probability of near-term escalation with Iran. Against this backdrop, investors have shown a preference for more defensive sectors including healthcare, consumer staples and utilities.
Rebuke of Trump’s policies in the midterms
Results in the US midterms demonstrated a resounding rebuke of Trump’s policies, as the Democrats retook control of both the House and the Senate and various governorships in historically Republican states. This means that Congress will now be a check on Trump’s actions at least domestically, while Democrat control of the Senate also means that the independence of the central bank, the Federal Reserve, will be protected. There is also likely to be more regulation around tech and AI, notably in those states where AI data centres are concentrated which were seen as being a key issue for voters.
Geopolitical developments also remained high on voters' agendas, particularly the conflict with Iran. The marked fall in oil prices after the midterm elections suggests markets are anticipating that a Democrat-controlled Congress may increase the likelihood of a diplomatic resolution and a reduction in regional tensions. However, despite the Republicans attributing some of their midterm losses to the conflict with Iran, risks remain elevated that Trump could choose to escalate military action again.
Elsewhere, economic momentum in the US remains solid. Consumer spending rose at an annualised 3.1% rate in the latest quarter, and the labour market continues to hold up well, with employers adding 165,000 jobs in October and unemployment staying low at 4.1%. Business surveys also suggest the economy is still expanding, with both manufacturing and services ISM readings remaining comfortably above the 50 threshold that distinguishes expansion from contraction.
UK rates rise to contain inflation
Meanwhile, in the UK, the Bank of England raised interest rates by 25 basis points to 4.0%, the first increase since 2023. Governor Andrew Bailey indicated that a further increase, as early as December, could be necessary if inflation pressures persist. The Bank expects inflation to rise from the current rate of 3.5% to around 5% in the second quarter of 2027, largely reflecting the energy price shock.
