Investors poised for gridlock with Trump as Democrats projected to sweep Congress

Investors faced the potential ​for tougher regulation and oversight in areas such as AI as well as for legislative ‌gridlock ​that could complicate the fiscal picture, as Democrats gained ground in the battle to wrest control of Congress from the Republicans and won several races for governor. Decision Desk HQ projected the Democrats to win control of both the Senate and the House of Representatives in Tuesday's US midterm elections.

The party's victory in the House was widely expected, though control of the Senate remained in the balance. President Donald Trump's Republican Party controlled ‌both chambers of Congress during the first two years of his second term. "There's still a number of areas where President Trump can influence the markets - trade and tariffs, foreign policy, and existing regulations," said Tai Hui, chief market strategist for Asia-Pacific at J.P. Morgan Asset Management in Hong Kong.

But even if a so-called "blue wave" were materialising, Democrats appeared unlikely to gain the two-thirds supermajority needed to override Trump's veto power, he said. "That will be one of the sticking points for the remaining two years of President Donald Trump's term," Hui added. Stock index futures swooned on Tuesday evening, with the S&P 500 ‌futures down 1.2% and Nasdaq futures off 2.1%. The US dollar index, which measures the greenback's strength against a basket of six currencies, was down 0.4% at a one-month low of 101.30.

"I don't think the big risk to markets is from the blue wave; it's investors ‌overreacting to a blue wave," said Michael Arone, chief investment strategist, State Street Global Advisors in Boston. "The bark is often worse than the bite," he added, of the possibility of Democrats winning control not only of the House but also the Senate. "As time passes, historically the periods after midterms are strong for markets."

Tuesday's outcome could hold broad implications for market-sensitive areas including the AI data-center buildout, the US fiscal outlook, defense spending and regulation in areas such as healthcare, banking and cryptocurrencies. Opinion polls had earlier shown the Democrats likely to take the House, but the Senate too close to call. A Democratic-led Congress could exert greater scrutiny over AI companies, in part due to growing public opposition to data centers, a ⁠risk for a ​market that has been lifted by such investments. While analysts see slim chances ⁠of viable legislation that would severely undermine the data-center buildout, they expect a Democratic sweep to lead to investigations into the technology sector.

"If the Democrats have a larger majority in the House and Senate, I think that could put some pressure on the technology trade," said Anthony Saglimbene, chief market strategist at Ameriprise. The midterms come at a fragile time for ⁠markets, with a swoon in AI shares causing investor unease that could be exacerbated by the election results. As Asian trade began, Japan's Nikkei 225 was down 4.5% at a six-month low, reopening after a holiday. MSCI's broadest index of Asia-Pacific shares outside Japan was down 1.9%, led by a 4% decline in Korean shares.

Kim Seok-hwan, ​an analyst at Mirae Asset Securities in Seoul, said foreign investors were selling Korean stocks as risk aversion increased following the Democrats' stronger-than-expected performance. He said a victory by Democrat James Talarico in Texas could weigh on chip stocks by fueling concerns over tighter ⁠regulations of AI data-center construction in one of the United States' fastest-growing data-center markets. "If Texas declares a moratorium on data centers, as New York did, projects could face further delays," Kim said. "Today's market reaction is clearly reflecting concerns and uncertainty over these issues." Cryptocurrencies also slumped, as bitcoin dropped 1.8% to $76,457.20 and ether fell 1.9% to $2,248.65.

"While the Democratic sweep was consensus leading in, ⁠the magnitude ​of the margin likely matters," said Nick Ferres, chief investment officer at Vantage Point Asset Management in Singapore. "The risk is around greater regulation of the AI and crypto complex," he added. "Also, there will likely be a challenge on the debt ceiling and potential impeachment of the president." INVESTORS ALSO WATCHING GOVERNOR RACES

Investors were also watching local races for their implications for the AI buildout in states such as Texas, where Democrat Gina Hinojosa defeated Republican incumbent Greg Abbott in the race to become governor. Democrat Keisha Lance Bottoms also won Georgia’s race for governor on Tuesday, becoming the first ⁠Black woman elected governor of a US state. "Those two states effectively make up about a third of all AI data center spend and projects," said Tapas Strickland, chief market strategist at Moomoo ANZ in Sydney. "The potential for it to slow is very much there, and ⁠that would obviously cascade through to the rest of the AI sector," he ⁠added. "I don’t think it necessarily stops the whole AI train, but it does slow it down.”

Investors also faced the potential for increasing legislative gridlock with Democrats in control of both chambers of Congress. That could raise the spectre of stalling budget negotiations and complicate the fiscal picture that has already rattled asset prices. Alex Morris, founder of F/m Investments, said investors could increasingly focus on fiscal issues in the coming weeks. "And frankly, no ‌candidate ran on a platform of fiscal responsibility," Morris ‌said.