Crude Crashes As Blue-nami Sparks Market Chaos; Bullion, Bitcoin, & Bonds Bid
Tl;dr: One word supports much of today's equity exuberance: "hedged" as the 'priced in' anxiety over a blue wave came to pass and so protection was unwound, slamming vols, and driving up stocks from ugly (data-centers/AI CapEx is dead) overnight lows (though we might add the word "rotation" to today's narrative). Tangential to this, oil priced plummeted as traders interpreted some penance from The White House as meaning a sooner end (less escalation) to the Iran War. That punched bond yields lower (despite solid macro as BEs plummeted) which dragged down the dollar, supporting gold and crypto (despite the latter now in the crosshairs).
Hedges were shredded...
Meanwhile, you cannot make this shit up.. from Trump!
First things first though, the question everyone has asked all day...
Why the rebound?
The goal-seeking for a bullish narrative was strong among the sell-side analysts today. Here's a roundup of some of the more reasonable ideas behind today's bounce...
- Clarity - the event is passed and Trump "absolutely willing" to accept the results
- Gridlock - lowers the risk premium. Dem majority plus Trump’s willingness to work with it “should act as a break on extreme policy outcomes and bring down risk premia” - DB Saravelos.
- Plunging Oil - recognition of Iran War as reason for Dem Sweep, Trump confirmed he wouldn't escalate in Iran any time soon, and "expect Dems to use fiscal deadlines to seek to limit the war with Iran" - GS Hatzius
- Hopes of Tariff Rollback - "...roll back selected tariffs, and reverse spending cuts enacted last year." - GS Hatzius, and it fits who led today with AAPL/MSFT surging as investors perceived the stock as a winner from the Democratic sweep.
- Hedges Unwound - deeply in the money protection was sold (driving down vol and sparking the heavy delta/gamma flow-driven rebound)
- Technicals - NDX bounced off its 200DMA
- Rotation - Money is moving out of AI CapEx (on worries that Democrats will regulate AI more) and into cash-generating MegaCaps.
- Seasonality - 6 months after the past 19 midterm elections, SPX higher 100% of the time, with an average gain of 14.18%.
We are sure there are more (obviously aside from the classic 'relief rally' argument), but those all seemed to add up to what we saw today...
As to the 'chaos' we described in the headline... how's this? 21 of Goldman's equity baskets are having > 3 sigma moves today, the highest since June 5th and 2nd highest on 1 yr lookback...
So let's start with equities...
Stocks & Credit
It wasn't just the NDX, all the major US equity indices reversed around 2330ET last night from ugly lows with DOW leading the charge (up 3% from yesterday's close). Some late-day 'profit-taking' wiped some lipstick off the tech pig (we'll see if this can survive the night as Korea comes in to play)...
NDX bounced off its 200DMA (Goldman said that AAPL, MSFT, and AMZN accounted for 65% of today's NDX move)...
SPX burst back above its 100DMA and found support/resistance at the 50DMA...
Activity levels were significantly higher than normal with Goldman's trading desk noting a '6 out of 10'in the pockets impacted most by midterms, but only about 2% better to buy. They said that their notional skews don't match how busy we are with LOs and HFs slightly better to buy on modest numbers...
- Info Tech sell skew is big (again) and for the 5th day in a row. We’ve net sold -$1.5bn today.
- Selling HC, Utes, and REITs
- Buying ETFs and Hyperscalers
It's not like traders didn't see this coming - as the odds of a Dem Sweep rose, so the Broad AI index had been falling for 5 months...
And AI Power has been pummeled back to its lowest levels of the year...
The dominant driver of the session was the post-election repricing across sectors most sensitive to the policy outlook...
But today saw a rotation from the AI CapEx spenders into the (once) cash-machines with Tech MegaCaps led the rebound, with AMZN surging over 8%, and AAPL and MSFT (both new record highs) each spiking more than +6%, pushing the Mag7 up over 3% for its best day since August...
Today's rotation was from the Check Receivers into the Check Writers...
Goldman described the clear rotation into hyperscalers with Semis being used as a source of funds.
Why?
If compute is more scarce because you cannot build more capacity, you can sell it for at a higher price.
If you cannot build more capacity, you are spending less, which in turn may lead to buying back stock again.
Elsewhere, we saw strength in Homebuilders also surged sharply as Treasury yields fell across the curve on expectations that a divided government would constrain the administration's fiscal agenda.
Interestingly, while Renewable energy stocks were another early standout (as the Dem win was widely interpreted as favorable for clean energy policy), they actually ended the day lower (lower oil means less need to replace?)...
Consumer discretionary stocks climbed to their highest levels since May, with 183 of 185 S&P 1500 Consumer Discretionary Index members trading higher.
But while the indices may look rosy, it wasn't all shits and giggles under the surface...
The Broad AI basket crashed almost 5% today as SPX Ex-AI rallied over 2%. It's been a rough few days for that pair...
NeoClouds, Optical Networking, and Data-Center stocks were all hammered following the Texas gubernatorial race, where the winning Dem candidate had campaigned for a moratorium on new data-center construction...
Elon Musk had a rough day as his combined TSLA/SPCX market cap dropped $126BN...
VIX puked back below 17 as hedges were unwound (profitably), dragging the market up with it..
And remember that thing everyone was worried frantically about a week or two back - cough, AI CapEx/Data-Center funding, cough - well today saw Data-Center CDS spreads hit a new record high...
But, Hyperscaler CDS spreads did compress (rotation) and IG spreads tightened...
We'll give top Goldman IG credit trader, Kevin Boova, the last word on the bullish narratives for equity/credit today:
Continue to think markets a buy. Markets tend to like gridlock and hard to ignore the seasonal post midterm stocks higher 19/19 times. We could be setting up for some pretty big supply/demand imbalances in compute... Which should be a big positive for infrastructure already in place and thus the hypers. While a slowdown in the buildout could have impacts on GDP growth, think that's not a right now thing, and on the margin ...
Building slow down and potentially slowing growth should be a tailwind for fixed income. Makes me much more bullish duration.
The neoclouds will be much more nuanced, but think this is going to be good for long dated hyper risk... Especially as orcl, meta, and googl deals are either in the rear view or continue to show their desire and ability to diversify their funding footprint.
Don’t think we see capex numbers come down anytime soon, and market will still get injected with a lot of things to buy throughout the cycle... But do think we are starting to see some near term tailwinds for the first time in a while.
However, Energy stocks bore the brunt across the board today with their worst day of the year. Refiners like Valero and CVR Energy crashed around 10%, and upstream names such as Devon, Kosmos, and Baytex each down 6–12%. Goldman's US Refiners basket was clubbed like a baby seal...
So, let's explore that shitshow next...
Energy
The dominant catalyst behind today's sharp selloff in crude oil is the Democratic sweep of both chambers of Congress in Tuesday's US midterm elections, which markets are interpreting as a meaningful step toward a quicker resolution of the ongoing Iran conflict.
Brent crude has plunged roughly 10% to a session low of $93.22 - its lowest level in two months - while WTI has fallen approximately 9% to around $87–88 a barrel.
The political read is straightforward: the midterms were widely seen as a referendum on the war and on affordability, and the Democratic victory is being priced as a reduction in the geopolitical risk premium that has kept crude elevated for months.
Adding further downward pressure, a social media post from Vice President JD Vance explicitly blaming Republican losses on the Middle East war reinforced the narrative of a potential de-escalation.
Bloomberg's Michael Ball noted that both future and option markets are moving decisively. Crude put volume has been running around 1.6 times calls, with heavy interest in December $85 and $83 WTI puts. Brent saw similar bearish flows with its call skew falling notably. That increasingly looks like higher conviction positioning for declines to stick.
More importantly, physical markets are validating the move. North Sea physical crude markets reflected the same dynamic, with the Forties grade offered down $3.80 to a premium of just $1.35/bbl over Dated Brent.
JPMorgan separately noted that the global oil market had already moved back into surplus in September and October, as recovering Middle Eastern flows and rising production elsewhere outpaced weak demand - providing a fundamental backdrop that amplified today's geopolitical repricing.
On diesel specifically, the picture is more nuanced.
US distillate stockpiles fell below 100 million barrels for the first time since 2003 - a structurally tight supply signal - with the steepest declines concentrated in the Midwest, where inventories hit their lowest since November 2014.
Despite that tightness, diesel prices crashed lower in sympathy with the broader crude complex, as the geopolitical risk unwind overwhelms the supply-side support. US diesel prices hit near two month lows...
The reflexivity of this is too ironic to ignore - the thing (Trump's Iran War) that basically triggered the Blue Wave (higher cost of living) is now crashing (to lower the cost of living) benefiting Americans as Dems take over (and Trump considers ending the War... too late).
Nevertheless, lower oil meant lower rates...
Rates
The collapse in oil dragged down US inflation breakevens, with 10Y BEs dropping to their richest levels since August...
...supporting a strong bid in Treasuries overall, but it was a wild ride. Yields are down 6-8bps across the curve with the belly modestly outperforming...
The 10Y Yield held firmly below 5.00% again - to its lowest closing level in two months...
Arguably, traders interpreted the Democratic win in Congress as a constraint on the Trump admin's fiscal agenda - limiting the scope for large deficit-expanding tax cuts - which reduced the supply premium embedded in longer-dated bonds.
The Treasury's quarterly refunding statement added a secondary catalyst: the department maintained auction sizes for notes and bonds unchanged "for the next several quarters," dropping the prior "at least" qualifier - a subtle but meaningful signal that dealers interpreted as opening the door to potential future supply increases, though not imminently.
Interestingly, given the decline in oil prices, Dec rate-hike odds actually rose (hawkish) modestly today...
Obviously, Friday's payrolls print is now the key near-term catalyst, with the potential to trigger a significant repricing of the Fed path if they surprise to the upside.
Fiat & Anti-Fiat
The dollar suffered its worst single-day decline since early September, as traders unwound trades built around Trump's pro-growth, high-deficit agenda...
Gold mirrored the dollar with its best day since August, back above $4050...
Bitcoin's move was more nuanced with weakness to start overnight (Crypto sceptics taking over), but then as the tech rotation accelerate, the biggest cryptocurrency ripped higher, back above $80,000...
Finally, we return to where we started above with a reminder of the shocking consistence of post-midterm seasonality. JPMorgan trader, Craig Cohen, notes that the SPX has been up a year after every midterm election since 1950 with an average gain of around 15%.
The worst one-year forward return came after the 1986 midterms but this, of course, had more to do with the 1987 crash rather than anything going on in Washington.
"I suspect that at least part of the reason for this tendency is that the midterms tend to see the incumbent party loses seats and gridlock in Washington tends to be good for Wall Street.”
Which fits with JPMorgan's pre-results expectations...
JPMorgan's Market Intel folks also noted that on a 3-month basis, the SPX has averaged a +5.4% return, 11.4% on a 6-month basis, 12.5% on a 9-month basis, and 14.7% on a 12-month basis.
The six, nine, and twelve month returns have a 100% hit rate dating to 1990.