Australian investors are closely monitoring global events, as a devastating Houthi attack on Saudi Arabia’s international airport has pushed elevated oil prices, inflation, and bond yields to the forefront. Concurrently, US President Donald Trump is actively seeking to lower diesel prices ahead of the US midterm elections. His administration has explored various options, including threats to Ukraine and suggestions of buying Russian diesel, before declaring an “energy ceasefire.” These efforts underscore the increasing pressure from rising fuel costs, which are exacerbating America’s cost-of-living challenges just weeks before the critical vote.
Trump’s “unapologetic pursuit of national power”—aiming to control global oil trade and lead in critical sectors—appears to clash with voter concerns over affordability. The midterms are thus pivotal. A Democratic sweep of both Congressional houses, now a 64 per cent probability, could signal a shift towards “populist socialism” with increased taxes and regulation, potentially hurting earnings. This “risk-off” scenario might see the US dollar and bond yields fall, with stocks tumbling by as much as 10 per cent, as investors anticipate a pullback from military and trade conflicts. Conversely, political gridlock, with Democrats securing the House but Republicans retaining the Senate, is seen as a “Goldilocks scenario” for markets, possibly yielding a 5 per cent pop in Wall Street equities.
These political dynamics emerge amidst growing scepticism in the market regarding artificial intelligence. Examples like the Firmus float and rising credit default swap rates for major players such as Oracle, SpaceX, and Nvidia highlight this unease. Nick Ferres of Vantage Point Asset Management noted that “Equities have been pricing a growth cycle, while the credit markets have started to price financing risk.” Despite potential midterm outcomes, the broader financial landscape remains challenging, with central banks globally having lifted rates 54 times this year, signalling tighter financial conditions ahead.
