Democratic sweep lifts EM hopes, sinks Asian chip stocks

Democrats won both chambers of Congress in the Nov. 3 midterms, and some analysts now expect the result to help emerging markets through cheaper oil, a weaker dollar and a less aggressive White House. The early market reaction was split, though. Developing-market currencies and Chinese stocks rose, while investors sold AI-linked shares in South Korea and Taiwan on worries that Washington could slow the data-center buildout.

Oil and the dollar

On Wednesday, Nov. 4, MSCI's emerging-market stock index recovered from a drop of as much as 1.8% and ended 0.4% higher. Its currency gauge gained 0.8% after the dollar fell and Treasury yields declined, Reuters reported. The Shanghai Composite climbed 2.2%, and the Mexican peso had its biggest one-day jump since April. "Ultimately, the relationship between risk premiums and whether emerging market is more attractive than developed market does rely to some degree on the strength of the dollar and the interest rates," said Vera German of the Neuberger Emerging Markets Equity fund.fidelity.com

Brent crude fell nearly 9% overnight to below $100 a barrel. Traders bet that President Donald Trump, now facing a Democratic Congress, would be less likely to escalate the war with Iran, and the dollar slipped to a one-month low against the euro, Reuters said Thursday. Jonathan Barratt, chief investment officer at ETO Markets, told NDTV Profit that lower oil and moderating inflation could help energy-importing economies. He added that a less aggressive US policy approach could take pressure off the dollar and support emerging-market equities.ndtvprofit.com+1

Chip stocks hit hard

The mood soured in Asia's tech hubs on Thursday. South Korea's Kospi fell 5.3%, and Taiwan's Taiex lost 3.2%, according to the Associated Press. Foreign investors sold nearly 4 trillion won of Korean shares, pushing the Kospi to a seven-month low, Money Today reported. Democratic candidates who campaigned in part on moratoriums on data-center construction won in Texas and Georgia. Even so, most analysts think demand for AI chips will hold up over time, though they now expect at least a temporary slowdown, Reuters noted.reuters.com+2

Macquarie said the main policy question is whether Washington keeps supporting the pace of data-center construction that AI spending depends on, Finimize reported.finimize.com

Limits on change

Some of the hoped-for relief may take time to arrive. Anjali Kaur of the Center for Strategic and International Studies said that a Democratic Congress would bring more investigations, subpoenas and control over spending. She cautioned that it would not automatically reverse Trump's tariffs or end the Iran conflict, because the president keeps his executive powers and his veto. Trade specialists likewise said lawmakers cannot easily take back existing tariff authority, since overriding a veto is difficult, Finimize noted.ndtvprofit.com+1

"The magnitude of the victory is what has caught markets off guard," Pepperstone's Chris Weston told Reuters.reuters.com