The Democratic Party's decisive election victory initially led markets to expect that President Trump might pursue a deal to end the Iran war, which would push oil prices lower and ease inflation pressures.
But a peace agreement cannot erase existing energy-side pressures overnight, and analysts say there remains enormous uncertainty over whether the conflict can be brought to a close.
Fiscal policy under the new Congress and a slowdown in AI infrastructure expansion will reshape the outlook for US economic growth; some analysts warn that fiscal tightening and cooling investment could trigger a mid-cycle economic slowdown in 2027, meaning the Federal Reserve will need to be more cautious about raising rates.
Market observers believe the Democrats' sweeping victory in the US midterm elections could restrain the pace of global rate hikes next year, but the direction of oil prices, data center regulation and fiscal policy remain key variables.
Central banks around the world have re-entered a monetary tightening cycle, with the Federal Reserve, the Bank of England, the European Central Bank and the Bank of Japan all having raised rates in recent months.
Part of the trigger for this tightening round is the US-Iran conflict pushing up oil and gas prices; the war has also intensified global refining capacity constraints, sending prices of refined products such as diesel, gasoline and jet fuel soaring.
Polls had previously favored the Democrats, and traders had already expected the party to make large seat gains, but uncertainty remained before the vote: whether the Democrats could take both the Senate and the House, giving Congress a stronger ability to check the Trump administration's policies.
After the Democrats swept both chambers, international benchmark Brent crude plunged 8.7% on Wednesday, falling below $100 a barrel for the first time since September.
Market interpretation: the election result may make Trump more inclined to negotiate a ceasefire to ease energy price pressures.
Vice President Vance issued a lengthy statement blaming the Republican defeat on the Iran war, further reinforcing that expectation.
AJ Bell market head Dan Coatsworth said: "The Republican camp has acknowledged that the Iran war cost them a clean election sweep, and the market reads it this way: a rapid resolution to the Middle East conflict would help the Republicans save face." "If a ceasefire brings a sharp drop in energy costs, Trump can also claim sole credit for that achievement."
Morgan Stanley senior portfolio manager and head of applied equity advisors Andrew Slimmon said: "If the election result drives a resolution to the Middle East conflict, oil prices could move lower. Oil prices are a major source of the Fed's inflation problem and part of the reason rates have stayed high."
Bank of America rates strategist Ralph Axel noted in a Thursday research report that historical data show oil prices and global rates are highly correlated. Higher oil prices over the next 3-6 months would likely push US rates higher, with the UK and Germany hit more noticeably.
He added: "When oil prices rise, rates are likely to follow; shorter-end rates are more affected, long-end term premiums less so, and monetary policy expectations are the dominant factor."
No way back for Republicans
But crude's rebound on Thursday and choppy trading on Friday show that a ceasefire deal for the nearly nine-month conflict is far from settled.
AJ Bell's Dan Coatsworth commented: "Oil prices have already rebounded, and rate expectations have not fundamentally changed compared with before the election."
Thursday's money markets showed that rate expectations in the US and Europe had adjusted only modestly from a week earlier: pricing indicated a slightly higher probability of rate cuts over a one-year horizon.
Based on Refinitiv data, the shift in two-year rate expectations was larger in the eurozone than in the US, with ECB rate pricing down 8.7 basis points this week versus just 4.6 basis points for the Fed.
Chatham House US and Americas program director Laurel Rapp said: "At this stage Republicans have almost no way back. Democrats will vote in both chambers to try to constrain the Republicans and limit the president's authority over the Iran war. But whether those resolutions can truly bind the administration is another matter."
Eurasia Group's Clayton Allen said on the Asia Finance Morning program that the Iran war is unpopular domestically in the US, but withdrawing from the Middle East without substantive gains would also draw criticism; he expects a risk of escalation in the coming weeks.
Bank of England Governor Bailey said in an interview on Thursday, the same day the central bank raised rates by 25 basis points, that energy price pressures come from multiple factors: shipping risks, refining margin dynamics, and winter cost pressures for European natural gas.
"A Middle East peace process cannot eliminate all of these factors at once," Bailey said Thursday. "We will wait and see. Oil prices have fallen over the past 48 hours, but the situation is extremely volatile, as we have experienced over the past seven to nine months."
KBRA European sovereign credit head Ken Egan said the core variable for the rate outlook is whether underlying economic momentum is strong enough to make inflation pressures more stubborn.
He wrote in an email: "Europe is entering winter after months of elevated energy prices, and the full impact of those price increases is still transmitting through the broader economy. The central bank's biggest fear is whether energy pressures will push wages and prices broadly higher, or whether weakening demand will block that transmission."
Growth outlook
Rabobank head of FX strategy Jane Foley said in an email that the key question for the Fed is whether full Democratic control of Congress will push the US toward more fiscal prudence and thereby lower inflation.
"But it is too early to judge the fiscal direction, and many Democratic candidates won on a platform of easing household cost-of-living pressures. So at this stage it is hard to draw firm conclusions about next year's rate path."
JPMorgan head of Asia-Pacific equity research James Sullivan said on the Asia Finance Morning program that the biggest question now is whether massive US fiscal stimulus will shift direction.
"High inflation is a combination of multiple factors: the Iran war, tariffs, and extremely tight supply in parts of the energy sector. At the same time, the US is in an expansion with low unemployment while government spending remains persistently high, and that has very clear macroeconomic effects. If fiscal policy shifts, rate pressure could ease and the Fed would gain more policy room."
Baird Strategas head of policy research Daniel Clifton believes that referendum results related to data centers across the US are another major variable to track closely.
He said on the Europe Finance Morning program: "In 2025 there was significant fiscal drag, but the AI capex boom offset the negative impact; this year much of the economic support has come from stimulus policy. If fiscal policy tightens while AI capex slows at the same time, a policy mistake could emerge at some point in 2027."
"This is very similar to the 2000 millennium tech bubble period: the Fed raised rates, oil prices rose, policy tightened too much, and that ultimately triggered a recession. Our base case is not a US recession, but a mid-cycle slowdown in 2027."
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