The Democratic Party has swept the National Assembly! Damo emergency redraw trading map: stock overallocation remains the same, AI data center becomes the biggest loser
The Zhitong Finance App learned that Morgan Stanley indicated in a newly released research report that the Democratic Party has already won control of the House of Representatives and Senate, although some election results are still being counted. This decisive election result shows that the situation is moving towards the “Democratic Party cohesive majority” scenario the bank envisioned. Under this scenario, the uncertainty brought about by the change in administration may be a drag on the overall performance of the stock market. The impact is similar to the market fluctuations caused by the Republican Party's new control of the House of Representatives after the 2022 midterm elections. However, implementation of SNAP (Supplemental Nutrition Assistance Program) and Medicaid (Medicaid) cuts may be delayed, which will benefit the consumer sector and put economic growth forecasts at some upward risk.
Damo said that the two parties' respective paths of relying on the partisan line to advance the Budget Coordination Act have been closed, which has eliminated the main upward risks faced by the US Treasury's financing requirements. Although delaying measures to cut SNAP and Medicaid spending would have the opposite effect, the impact is likely to be small compared to the $2 trillion fiscal deficit.
The key to the policy game is more likely to focus on the short-term level, as the Democratic majority can forge consensus around policy demands and use the December government funding deadline and the 2027 debt ceiling issue as bargaining chips.
In terms of major market impacts, AI market sentiment may be further negatively affected as market expectations for data center restrictions heat up. However, Damo believes that the new adverse effects will have the characteristics of individual regions and will not change the overall development narrative of AI capital expenditure. The benchmark scenario assumes that AI-related capital expenditure will remain stable. Meanwhile, the overall outlook for Morocco to maintain resilience to economic growth and continue to slowly decline in inflation still holds true.
In the foreign exchange market, Damo expects that short-term trading will still be in line with its defensive market scenario, where the yen, the Swiss franc, and the euro are stronger against the US dollar. AI-related adverse factors may cause the Australian dollar to lag behind in cross-exchange rates, while the risk of targeted tariffs may put pressure on the Canadian dollar compared to low-yielding currencies. The increasing resistance of the National Assembly to the further escalation of the geopolitical conflict may also put downward pressure on the NOK/SEK exchange rate.
Possible policy paths
There are four areas to focus on:
1. Fiscal policy. Dama anticipates that measures to reduce SNAP and Medicaid spending in the “A Big and Beautiful Act” (OBBBA) may be rescinded, postponed, or relaxed during negotiations over the fiscal policy period. The Democratic Party is likely to have a large enough majority to be able not only to coordinate different opinions within the party group, but also to form consensus around a few policy goals. Overall, however, even if these cuts are delayed, the bank still believes that the US fiscal deficit will remain around 6% of GDP.
2. Executive-led policies. Damo believes that since the beginning of President Trump's second term, policy uncertainty has mainly been related to the actions of the executive branch rather than legislative action. Policies on tariffs, geopolitics, trade (particularly the USMCA) review), deregulation, and export controls are expected to continue, so it should be expected that policy uncertainty will remain at a certain level.
3. Data center restrictions. Damo believes that the actual risk is that state-level rules promoted by newly elected officials may further divide the US, leaving some regions open to building new data centers, while others will not allow such projects to be implemented. The key levers that can actually bind the project, including grid connection, large-scale load electricity price design, site selection, and tax relief, are almost entirely in the hands of state supervisory boards, state legislatures, and county councilors. As a result, changes in powers in some state governors deserve close attention, but the impact may be limited to specific jurisdictions.
From the perspective of data center development, the most important outcome of this election is undoubtedly the Texas gubernatorial election. In Texas, Democrat Gina Hinojosa was elected governor, increasing policy risks related to data center approvals and construction progress. Gina Hinojosa's campaign platform includes suspending approval of new data center projects. Considering that the Texas governor can participate in the approval of new data center projects through multiple regulators, Damo believes that many projects may face the risk of being drastically delayed.
4. Release the 2028 election signal. Dama has always believed that the midterm election results should not be directly extrapolated to the 2028 presidential election. However, the next two years will be a window period for lawmakers to lay the foundation for federal-level policy actions in 2029 and beyond, provided that control over the presidency eventually changes at that time. Damo believes that lawmakers may propose legislation aimed at AI infrastructure construction, such as abolishing the immediate fee policy in OBBBA or taxing computing power. However, given the president's opposition to such measures, it is unlikely that such legislation will actually be introduced.
Key Market and Economic Impacts
US stocks. As discussed in Taiwan's report last week, the midterm elections are one of the most obvious risky events that have come to fruition, and historical performance has also provided encouraging signs. Since 1982, in the six months after the midterm elections ended, large-cap stocks have risen by an average of about 15% when weighted by market capitalization and an average increase of about 16% when weighted; in the following year, both indicators have increased cumulatively by about 22%.
Damo believes that investors generally expect the Democratic Party to sweep the election and get a weak majority in the Senate. Therefore, considering that the Democratic Party won the Texas gubernatorial election at the same time, this result may increase short-term market fluctuations. However, the bank believes that this may also mark the final stage of rolling market adjustments that have been discussed since the summer of this year. After the election, if the military conflict between the US and Iran escalates again, or if the US imposes further tariffs, it may also pose a short-term risk.
Cross-asset allocation. Based on the results of this midterm election, Damo continues to suggest overallocating global stocks and underallocating core fixed income assets. Since this year, the bank has taken a constructive view on global equities, mainly based on the expectation that the AI capital expenditure cycle will continue. Since US technology-related investment may not change much at the overall level, Damo expects that profit support for companies in various regions, including Europe and emerging markets, will not disappear.
Overall, the outlook for the global fixed income market has not changed. Although market sentiment about AI-related capital expenditure is less optimistic, digital infrastructure financing needs will continue to support corporate credit issuance at a high level. Mass issuance is likely to widen credit spreads, particularly in the area of bonds with low credit qualifications.
In addition to AI factors, oil prices and financial risks in regions other than the US are still important factors affecting the correlation between stocks, yields, and equity bonds, and are just as noteworthy as the US political situation. The midterm election results did not substantially change these factors. Until these factors change, Damo's asset allocation position will not change: continue to overallocate stocks and underallocate core fixed income assets.
AI market sentiment and capital expenditure. In view of the defeat of incumbent officials in some key state and local elections, Damo believes that the election results may have the greatest impact on AI market sentiment, as the local level may introduce more lasting and more extensive restrictions. The bank anticipates that the new adverse effects will be characteristic of individual regions and will not change the overall development narrative of AI capital expenditure, but may cause differentiation between different regions of the US: some regions allow new data centers, while others do not.
US interest rates. The Democratic Party controls both houses of Congress at the same time, which means that the Republican-led budget coordination bill will not be able to advance after the new Congress meets in January next year, thus eliminating the main upward risks faced by the US Treasury's financing requirements.
Market pricing before the election already reflects investors' limited expectations for the supply of foreign bonds, because the forecast market believes that the probability that the Republican Party will control the Congress uniformly is only in single digits, which means that the potential benefits of the relevant results to interchange interest spreads may be limited.
The new majority party may seek to defer SNAP and Medicaid spending cuts at every fiscal policy deadline, which could slightly increase the size of issuance in the 2-7 year bond sector. Overall, Damo believes that the middle of the US Treasury yield curve may only show moderate relative underperformance.
If the debt ceiling is not raised during the Lame Duck session, the US Treasury will increase the size of the interest-bearing treasury bond auction in February 2027 as planned. At that time, the Democratic Party may seek to attach its priority policy claims to the next debt ceiling increase plan, thereby extending the time required to resolve the issue. This may lead to lower prices and higher yields of short-term treasury notes due around the so-called X date (that is, the date the US Treasury expects to exhaust special financing measures and cash balances). At the same time, long positions on the SOFR/federal funds interest rate base at the end of the third quarter of 2027 may become more and more attractive.
Regarding AI, the issuance of related corporate bonds has become a source of supply for long-term assets, so the market believes that there is a link between data center construction and 10-year and 30-year US bonds and credit spreads. If restrictions at the state and local levels cause construction to slow down, smaller AI-related bond issuance programs may reduce the supply of long-term assets, which may drive the price of 10-year and 30-year US bonds higher and lower yields. Damo's benchmark scenario assumes that AI-related capital expenditure will remain stable, so we see this as a risk scenario rather than a basic forecast. Despite this, changes in investors' views on the probability of different outcomes may still provide a path for a further decline in US Treasury yields.
dollars. Damo believes that the market is taking into account factors such as more barriers to AI-related investments, increased congressional resistance to another escalation of geopolitical conflicts, and increased risk of targeted trade actions.
In the short term, Damo expects foreign exchange transactions to be in line with our defensive market scenario, where the yen, the Swiss franc, and the euro are strengthening against the US dollar; while the Australian dollar may lag behind in the cross-exchange rate because it is more sensitive to AI-related stock market sentiment, especially after the Democratic Party won the Texas gubernatorial election.
Damo also anticipates that the Canadian dollar will lag behind low-yielding currencies as the market takes into account the increased risk of US tariffs. Coupled with potential political and financial resistance that may limit the further escalation of the geopolitical conflict, these factors may temporarily put downward pressure on the NOK/SEK exchange rate.
The American economy. The overall outlook for Malaysia to remain resilient to economic growth and that inflation continues to slowly fall back still holds true. Under this scenario, economic growth faces even greater upward risks. SNAP and Medicaid cuts may be delayed, or personal consumption growth in 2027 will receive an additional boost of up to 0.4 percentage points, and support the faster spread of consumer spending to a wider range of sectors.
AI-related financing. The focus of AI-related financing may gradually shift from electricity and data center shell financing to chip financing. When the project enters the chip installation phase, activities such as data center construction and electrification have usually been completed, and these are precisely the links most vulnerable to potential policy resistance. This shift is likely to drive the credit-yield curve to continue to flatten.
American Health Services. Democratic sweeping elections may be viewed by the market as favoring Medicaid-focused managed healthcare companies, such as Consego (CNC.US) and Molina Healthcare (MOH.US); while managed healthcare companies with diversified businesses — UNH.US (UNH.US) and CVS.US (CVS.US) — are likely to receive only a relatively mild market response.
The election results will give Congress more room to advance the Democratic Party's health-care policy priorities, including reinstating enhanced Affordable Care Act (ACA) subsidies or removing parts of the Republican Party's Medicaid spending cuts, such as job requirements.
Although Damo still believes that major changes in health policy are unlikely until the next presidential election cycle arrives, the election results may change the direction of related policy discussions, especially after several key supporters of Trump's health policy/ “Make America Healthy Again” (MAHA) agenda have left office.
Companies that focus on Medicare Advantage (Medicare Advantage Program), such as HUM.US (HUM.US), may weaken due to the market's initial reaction, as Medicare Advantage is still more closely linked to the Republican Party's policy agenda. However, according to Damo, the stock price reaction may have significantly greater benefits for Medicaid-related companies.
Lame Duck Meeting Period: What Happens Next?
Damascus focuses on the following policy catalysts worth paying attention to before the end of the year:
Government funding. The US government has passed a Continuing Funding Resolution (CR) to maintain the current level of government funding until December 11. At that time, Congress must pass another continuous funding resolution or pass a year-round funding bill to avoid another government shutdown.
The Democratic Party leadership has sent out a signal that they hope to complete the review of various funding bills during the Lame Duck session. However, according to Dama, the election results will determine whether the leaders of the two parties will extend the relevant debate until 2027.
According to previous research by Damo, the impact of the government shutdown on the market was limited, mainly reflected in delays in the release of economic data, rather than causing substantial economic downside risks. The bank also mentioned in a previous report on Washington policy trends that experts believe that the continued funding resolution may continue until the 2027 calendar year (CY27), and this risk cannot be ignored.
national defense. The basic scenario for Damascus is that the 2027 National Defense Authorization Act (NDAA) will be passed before the end of the year. Notable elements of the bill include: some export control legislation may be included, such as the MATCH Act (which aims to coordinate export control measures among allies), the AI OVERWATCH Act (which formally incorporates the Ministry of Commerce's chip export policy into law), the Chip Security Act (involving chip location verification), and the Remote Access Security Act (RASA).
Overall, Damo believes that the policy direction will be to further strengthen restrictions, and that the driving force for this trend will increasingly come from Congress, while the US government gives priority to maintaining a stable relationship with China.
Regarding the Department of War (DoW) basic budget and additional funding, Damo believes that the White House's budget request of about 1.5 trillion US dollars is quite aggressive, but the bank will pay attention to whether additional funding will go through the budget coordination process in the next few months. Office of Management and Budget (OMB) Director Russell Vought expressed optimism in early October, believing that Republican lawmakers will push the Budget Coordination Bill to successfully complete the legislative process during the Lame Duck session, but the bank still believes that related efforts will face considerable resistance.
“Third Budget Coordination Act” (Amendment 3.0). Apart from foreign defense funding, the Lame Duck Conference is the last suitable window for the Republican Party to push for a package of legislation alone. Damo believes that the legislative schedule is very tight, and there are still many priorities to be addressed before the end of the year. However, according to its interest rate strategists, this will be the main upward risk faced by the US Treasury's financing needs.
The debt ceiling may also be addressed in advance through a budget coordination plan before the end of the year, but Damo believes that it is more likely that the debt ceiling issue will be a catalytic factor in the second half of 2027.
Based on anticipated financing needs, the bank's interest rate strategists estimate that the US public debt balance will hit the debt ceiling in March 2027, that is, the debt ceiling will begin to become binding. And the so-called “X date” — the date when the US Treasury has exhausted all special financing measures and cash balances, and is no longer able to meet all of its debt obligations in full and on time — is expected to be at the end of the third quarter of 2027.
Leadership elections. The leadership vote will be held soon after the election, and the appointment of committee members will be carried out simultaneously. Tonight's election results mean that the Democratic Party will get positions in the committees of various committees. These positions are usually occupied by former senior minority party members.
From a broader perspective, the arrangements and voting results for committee members and chairpersons can reflect the likely future direction of overall policy development in related fields. For example, health policies may be reflected through Health, Education, Labor, and Pensions Committee (HELP Committee) arrangements.
Reform of the approval system. The “American Affordability and Jobs Act” (American Affordability and Jobs Act), which is supported by both parties, will reform the federal environmental review system and provide greater certainty for approved projects. Additionally, the Act requires data centers to bear the transmission costs associated with them (this effectively changes the Ratepayer Protection Pledge) from a voluntary commitment to a federal mandatory requirement). Damo believes that due to major differences in policy between the two parties and the limited legislative schedule, there is still uncertainty about whether the bill can be passed.
Data center restrictions come into focus
Democrat Gina Hinojosa's victory in the Texas gubernatorial election may increase policy uncertainty and limit future data center supply, thereby increasing the relative value and pricing capacity of existing data center facilities that have received power guarantees.
In August of this year, Texas suspended some data center grid-connection processes after Texas Governor Greg Abbott requested a review of all data center projects queued by the Texas Electric Reliability Commission (ERCOT) to be connected to the grid. At that time, the relevant grid-connection applications had reached about 474 gigawatts, which was more than 5 times the highest peak electricity demand in ERCOT's history. Among them, data centers accounted for about 90% of the new electricity demand applications.
Abbott warned that such large-scale development could threaten the reliability and stability of the grid, prompting ERCOT to postpone the first batch of “batch zero” (Batch Zero) transmission planning studies for the first batch of new large-scale load grid-connected processes in Texas. Part of the purpose of this review is to distinguish between truly credible projects and speculative applications, which may exaggerate predictions of future electricity demand in Texas.
As far as actions the Texas governor can take are: issuing an executive order — temporarily suspending new projects until the state legislature establishes clear guidelines. However, if the Republican-led state legislature acts quickly, this suspension could last only a few months.
Appoint members of the Electricity Regulatory Authority — that is, members of the Texas Public Utilities Commission (PUCT). The term of the members of the committee is six years, and the next term expires in 2027.
Provide guidance to state agencies on approval policies — for example, suspending licenses that have not yet been issued by relevant agencies. Governor-elect Hinojosa has always insisted that the suspension order be implemented until the relevant laws are introduced, and that the scope of application is for new project permits rather than projects that have already begun construction.
The following measures require legislation to be implemented: promote more lasting policy adjustments, including tax policy changes, such as abolishing sales tax exemptions; give local governments the power to veto projects; governor-elect Hinojosa plans to give local officials the power to negotiate with developers, but this requires amendments to the law; formally incorporating electricity user protection measures into the law; and stipulating that projects must employ union workers. All of these measures require approval from the state legislature.
In Ohio, Democratic candidate Amy Acton's election as governor also posed a significant risk of delays to the state's data center project. The biggest project at risk in Ohio is a 10-gigawatt project involving Nvidia and a major US AI lab. Another major project under construction is Amazon's 1.5 gigawatt facility in Fayette County.
In May of this year, Ohio suspended consideration of new data center tax exemption requests, while the state legislature examined the growth of the state's data center industry. Tax exemptions are a critical factor for data centers to consider when choosing where to land a project.
Damo anticipates that private infrastructure investment platforms (PSP) with significant exposure in Texas may be under pressure. The bank's initial judgment is that the probability of success previously set for several potential data center projects in Texas may need to be lowered, particularly those subject to a “batch process” (Batch process).
Damo will keep a close eye on governor-elect Hinojosa's statement, particularly whether she may freeze the final classification of the proposed data center project in the “batch process.” These projects include GLXY's Helios II, CIFR's Colchis campus, and MARA's development project.
Damo also wants to know more about whether projects under construction will be affected, including GLXY's Helios I Phase II and Phase III, HUT's Beacon Point, and multiple CIFR projects. We believe these projects are less affected by policy uncertainty.
Specifically, Damo anticipates that the independent power producers (IPPs) sector as a whole will experience a short-term decline driven by market sentiment, but before considering the potential upside brought about by the data center business, the cash flow, contracts, and forward price curves of existing assets will still support the valuation. For power equipment and field power supply companies, the overall performance of this sector will be lagging because of the risk that data center industry growth may slow down, not just because of exposure to the Texas market. Utility companies with large Texas business exposure are most sensitive to potential downside risks. The potential impact may come from two aspects: first, data center activity is slowing down; second, as the term of the Supervisory Committee expires, a new Supervisory Committee may be appointed (the term of two members will expire in 2027), and the new regulatory policy may be more detrimental to investors.