Gulf investors eye relief rally as markets shake off US midterm shock

By Daniela Hathorn, Senior Market Analyst at Capital.com

The fallout from the US midterm elections is being felt well beyond Wall Street, and investors across the Middle East are watching closely. With most Gulf currencies pegged to the US dollar, swings in the greenback, Treasury yields and gold prices quickly feed through to regional portfolios and borrowing costs. The Democratic takeover of both chambers of Congress initially triggered a sharp selloff in equities and the dollar, as investors sought safety in US Treasuries and precious metals. That risk-off move has since given way to a relief rally, particularly across Asian equities, as investors reassess what the result really means. Nasdaq futures have recovered from losses of more than 2% to trade around 0.4% lower, suggesting the initial reaction may have been overdone.

Part of the recovery also reflects President Trump’s conciliatory tone following the results. Despite Republicans losing control of Congress, Trump signalled a willingness to work with Democrats and potentially reach agreements on key issues. This has eased some concerns about prolonged political confrontation and legislative gridlock, although his continued veto power means significant policy disagreements remain likely. Even so, his comments offer investors some reassurance that cooperation is still possible, even if the political landscape has become considerably more complicated.

Technology stocks have been particularly sensitive to the outcome, amid concerns that a Democratic-controlled Congress could bring greater scrutiny of AI investment, data centre expansion and the wider technology sector. However, the rebound in Nasdaq futures suggests investors are beginning to recognise that a shift in congressional control does not automatically translate into an immediate change in economic policy. The substantial AI investments already underway are unlikely to be reversed overnight, although tighter regulatory scrutiny could add to the headwinds facing a sector already grappling with concerns over stretched valuations and monetisation.

Currency and bond markets have also steadied. The US dollar initially slid to its lowest level in more than a month, while the 10-year Treasury yield fell towards 4.90% as investors priced in the prospect of more constrained fiscal spending. Yields have since recovered and the dollar has stabilised. A divided government could limit further fiscal expansion, potentially easing some pressure on Treasury yields, but the risk of protracted budget negotiations and political gridlock remains. Meanwhile, gold and silver have benefited from the initial uncertainty and lower yields, although their ability to hold on to those gains will depend on the broader outlook for inflation and Federal Reserve policy.

Ultimately, the rebound suggests investors are starting to look beyond the immediate political shock. Trump’s willingness to engage with Democrats has provided an added layer of reassurance, while greater clarity on the election outcome is encouraging some dip-buying after recent weakness. However, the relief rally should not be mistaken for a fundamental improvement in the economic outlook. Persistent inflation, elevated borrowing costs and lingering questions over AI profitability remain key challenges. The real test will be whether the recovery can carry through into the US trading session, and whether political cooperation translates into credible economic policy. For now, the election has reshaped the political landscape, but the underlying drivers of financial markets remain largely unchanged.