Democrat sweep gives markets a reason to rethink path of interest rates — SkimNews
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- Brent fell 8.7% on Wednesday after Democrats won both the House and Senate, closing below $100 a barrel for the first time since September — a move attributed to expectations that Trump is more inclined to strike a deal ending the Iran war and restoring Gulf refinery capacity and export conditions.
- JD Vance made a lengthy statement blaming Republican losses on the Iran war, reinforcing that view; AJ Bell's Dan Coatsworth said markets heard an "admission from the Republican camp that the Iran war cost them a clean sweep," and that Trump "might relish the opportunity to take all the credit" if ending the war brings a big drop in energy costs.
- Ralph Axel at Bank of America, citing a tight historical correlation between oil prices and global rates, said higher oil over the next three to six months would mean "significantly higher interest rates" in the U.S., especially the U.K. and Germany, with the front end most exposed to monetary policy expectations.
- European Central Bank two-year rate pricing fell 8.7 basis points on the week versus 4.6 basis points for the Fed, per CNBC's analysis of LSEG data, as money markets in the U.S. and Europe priced a slightly higher chance of monetary easing over a one-year horizon.
- Andrew Bailey said the Bank of England hiked rates by 25 basis points on Thursday, attributing energy price pressure to a combination of obstructions on the Strait of Hormuz, a shortage in refining capacity and low European gas storage — and warned a Middle East peace process "will not shift all of those elements."
- Clayton Allen of Eurasia Group said he expects an escalation within weeks, noting the Iran war is unpopular at home and so is leaving the Middle East without tangible wins; Dan Coatsworth added that oil has begun climbing back up and interest rate expectations "have not radically changed from pre-election levels."
- Jane Foley of Rabobank called the key Fed question whether the blue sweep brings more U.S. fiscal prudence and less inflation, but said it is "very early" to judge because many Democrats were voted in to soften cost-of-living pressures; J.P. Morgan's James Sullivan called high federal spending the "million dollar question."
Why it matters: Europe's two-year rate pricing fell 8.7 basis points on the week versus 4.6 for the Fed, giving European borrowers more relief than U.S. borrowers from the sweep. The BoE's 25-bp hike shows the limit: Hormuz obstructions, refining shortages and low gas storage would persist even with a peace deal, keeping energy inflation alive.
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