Markets fall first on Democrats' victory, then recover; Tesla shares under pressure

After the Democratic Party regained control of both the Senate and the House of Representatives in the U.S. midterm elections, global financial markets initially fell sharply before share and dollar indices gradually began to recover. The international news agency Reuters reported the development.

An unexpected Democratic victory in Republican strongholds raised fears that stricter regulation and oversight of the artificial intelligence (AI) sector would be imposed through the legislature, delivering a major shock to the stock market at the start of trading. Investors took a cautious position on investment in AI companies.

U.S. stock futures fell by nearly 2 percent in overnight trading, but recovered to positive territory by the European morning session. The MSCI All-World Index rose 0.13 percent and Europe's Stoxx 600 index rose 0.5 percent.

At the same time, futures for the Russell 2000 index, which is closely tied to the U.S. domestic economy, rose 0.7 percent, after falling by nearly 1 percent in the previous session.

Immediately after the election results were announced, shares of Tesla and SpaceX, owned by billionaire Elon Musk, fell by about 4.5 to 5 percent on Europe's Tradegate platform. Shares of other top technology firms, however, fell by a comparatively smaller 0.3 to 0.9 percent.

With global markets buoyant in recent years on the back of huge investment by technology companies centred on the AI sector, investors are taking a cautious stance at any prospect of policy or legal obstacles, the report said.

Commenting on the shift in political power in the U.S. legislature, Deborah Cunningham, chief investment officer for global liquidity markets at Federated Hermes, said very few people at the start of the year could have imagined the Democrats achieving such a two-way victory in the midterms. She said the blue wave meant the federal government would be divided on most policy issues. That usually creates a kind of gridlock in making new laws, she said, and financial markets overall traditionally view such an environment positively because it reduces uncertainty.

Analysing the market situation, Kathleen Brooks, research director at XTB, said that overall the election result had so far had a fairly mild impact on the market. She said investors would now move past the phase of uncertainty centred on the election result and focus trading on how much real impact it would have on policy.

Brooks said that while Wednesday's situation was bad news for Tesla and SpaceX, semiconductor companies, which are essentially the backbone of the AI trade, could overcome concerns over AI regulation and hold on to Tuesday's excellent gains to move forward.

Many investors moved into safe investments such as bonds on expectations that the change in the political balance in the legislature could lead to government spending restraint and reduce the likelihood of interest rate rises. The benchmark U.S. 10-year Treasury yield fell 3 basis points to 4.92 percent, putting major pressure on the dollar's exchange value.

Prashant Newnaha, senior rates strategist at TD Securities, said the bond market was emerging as the clear winner here, because financial markets had put the AI trade under intense pressure and were welcoming the increased possibility of new tax-cut plans being shelved and government spending falling.

As the dollar weakened in currency markets, the euro rose 0.4 percent to 1.133 dollars and the British pound rose 0.5 percent to 1.348 dollars. The dollar lost 0.6 percent against the Swiss franc, known as a safe-haven investment, and 0.4 percent against the Japanese yen.

Meanwhile, crude oil prices also fluctuated amid diplomatic talks to end the wars in Ukraine and Iran alongside fears of supply disruption. Brent crude fell 0.4 percent on the day to trade at 103.17 dollars per barrel.