Dems the rules

The US midterm elections have delivered a decisive victory for the Democrats, prompting markets to reassess the outlook for AI investment, the conflict in the Middle East and US fiscal policy. Meanwhile, the Bank of England has delivered its widely anticipated 25-basis-point rate hike, but its accompanying guidance has surprised on the hawkish side.

In this episode, Imogen Bachra is joined by global market specialist Brian Daingerfield to examine the implications for US and UK rates markets, explore the potential political and economic consequences of the midterm results, and discuss what investors are saying about the outlook for UK government bonds.

Key takeaways

1. Democrats’ sweeping victory raises questions over the pace of AI investment

The scale of the Democrats’ success, particularly in state and gubernatorial elections, has reinforced concerns about the regulatory environment facing the AI industry. While congressional gridlock limits the scope for federal legislative change, Democrat-led states could introduce restrictions on data centre development and AI expansion. The result has been renewed pressure on technology stocks, with investors questioning whether the political momentum behind AI investment could begin to shift.

2. Markets anticipate a more cautious US approach to the Iran conflict

The election results have increased expectations that the Trump administration will seek an off-ramp from the conflict in the Middle East. Voters have sent a clear message about their dissatisfaction with the war and higher energy prices, encouraging markets to price in a greater probability of de-escalation. However, the president retains considerable control over foreign policy, meaning the possibility of further escalation cannot be ruled out.

3. US fiscal risks remain, despite the move towards political gridlock

The Democrats’ victory makes further large-scale Republican fiscal stimulus less likely, but it does little to resolve longer-term concerns about US debt and deficits. Political gridlock could also result in spending compromises rather than meaningful fiscal consolidation. Lower Treasury yields offer some relief by reducing debt refinancing costs, but do not address the underlying sustainability of the US fiscal position.

4. Bank of England delivers a hawkish surprise alongside its expected rate hike

The Bank of England raised Bank Rate by 25 basis points, as expected, but the accompanying message was considerably more hawkish than anticipated. All nine Monetary Policy Committee members supported a rate increase, with one voting for a larger 50-basis-point move. Updated inflation scenarios suggested an optimal policy rate of around 5% across all three scenarios, while Governor Andrew Bailey acknowledged that current market pricing reflected a reasonable upside risk premium. NatWest’s central forecast remains for a further hike in February, taking Bank Rate to 4.25%, although the risks have shifted towards a higher peak.

5. UK fiscal concerns and the possibility of an early election remain on investors’ radar

Client discussions suggest growing recognition of the medium-term risks surrounding the UK’s fiscal outlook, particularly elevated debt-servicing costs and potentially optimistic assumptions underpinning the government’s fiscal forecasts. While the Budget failed to trigger the anticipated market reassessment, several upcoming events could act as catalysts. The possibility of a UK general election next year is also attracting attention, although NatWest puts the probability at just 10–15%, below both market pricing and the consensus emerging from investor discussions.

Host: Imogen Bachra, Head of Economics and Markets Strategy
Guests: Brian Daingerfield, Co-Head of G10 FX

 
This episode was recorded on 5 November 2026.
 
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