By Lewis Krauskopf, Suzanne McGee and Gregor Stuart Hunter
NEW YORK/SINGAPORE, Nov 4 (Reuters) - Global stocks swung between gains and losses on Wednesday as investors weighed the prospects of tougher regulation, higher taxes and oversight of areas such as AI and cryptocurrencies, after the Democratic Party swept the US midterm elections.
With Democrats winning control of both the Senate and the House of Representatives after Tuesday's vote, markets saw the potential for legislative gridlock between
US President Donald Trump's administration and the newly elected Democratic Congress.
Still, the 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.
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.
Opinion polls had earlier shown the Democrats likely to take the House, but the Senate too close to call. 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 materializing, 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.
AI TRADES ENCOUNTER TURBULENCE
Stock index futures swooned as the results started to emerge but later trimmed losses on Wednesday, with S&P 500 futures down 0.5% and Nasdaq futures off 0.8%. The US dollar index, which measures the greenback's strength against a basket of six currencies, was down 0.2% at a one-month low of 101.51. [MKTS/GLOB]
Investors were also watching local races for their implications for the AI buildout in states such as Texas, where Democrat James Talarico won the Senate race and Democrat Gina Hinojosa defeated Republican incumbent Greg Abbott in the race to become governor. Democrats Keisha Lance Bottoms and Jon Ossoff also won Georgia’s race for governor and the Senate, respectively.
"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.”
ASIAN SUPPLIERS YO-YO
In Asian trade, dip-buyers emerged to scoop up bargains later in the afternoon.
Japanese memory chipmaker Kioxia Holdings fell as much as 15%, while AI investor SoftBank Group plunged 10%, but both later cut losses.
“The declines in Japanese AI stocks will be limited as they have become cheap," said Kazunori Tatebe, chief strategist at Daiwa Asset Management in Tokyo. "Their earnings are solid, and they have revised up their earnings per share while share prices are down."
In China, the CSI New Energy Index jumped 3.5%, while the SSE Star 50 Index surged 10% on gains for Chinese chipmakers.
MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.1%, erasing losses after a turnaround in Korean shares, which overcame a decline of as much as 4% before rallying to trade 0.6% higher.
TRADE RELATIONS
The White House still has significant authority to pursue foreign policy and implement tariffs without approval from Congress, though its powers have been constrained by Supreme Court decisions earlier this year.
"For countries like India that are still negotiating trade deals with the United States, the midterm results could provide an incentive to adopt a wait-and-watch approach as governments assess the implications for broader trade relations," said Dhiraj Nim, senior economist and FX strategist at ANZ in Mumbai.
The relationship between Trump and Chinese President Xi Jinping will also be in focus, with some investors expressing optimism that the status quo can be maintained.
"Some have described the US-China relationship as 'L-shaped'- dropping down and then remaining flat along the bottom," said Shan Weijian, executive chairman and co-founder of PAG in Hong Kong. "I agree. I don't think the relationship will either improve or deteriorate significantly."
DIGITAL ASSETS FACE NEW REALITY
Cryptocurrencies also fell, with bitcoin down as much as 2.79% to $75,666.11 and ether 1.9% lower at $2,248.65, before reversing losses to trade flat later in the day.
"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.
One of the bigger setbacks for crypto bulls was the comeback of Democrat Sherrod Brown, who won Ohio’s special US Senate election on Tuesday two years after losing his seat in the chamber. Brown, who has criticized the crypto industry's Washington influence, triumphed despite the efforts of Fairshake, a crypto super PAC backed by Coinbase and Ripple among others, which spent $30 million to oppose his bid.
FISCAL WORRIES
Investors also faced the potential for increasing legislative gridlock with Democrats in control of both chambers of Congress. That could raise the specter of stalling budget negotiations and complicate the fiscal picture that has already rattled asset prices, while also dampening the AI sector, which has powered US economic growth.
The yield on the US 10-year Treasury bond was down 1.3 basis points at 4.933%.
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.
(Reporting by Lewis Krauskopf, Suzanne McGee and Gregor Stuart Hunter; Additional reporting by Saqib Iqbal Ahmed, Laura Matthews, Noel Randewich, Tom Westbrook, Hyun Joo Jin and Rocky Swift; Editing by Megan Davies, Cynthia Osterman, Daniel Wallis and Lincoln Feast.)
