Watch Episode 18, The Political Unwind: https://youtu.be/V8jZ26_zNWk
On Thursday 5 November the Philadelphia semiconductor index fell 12.3%, its worst day in about six and a half years, and the Nasdaq went into correction, more than 10% below its 6 October record. The reason investors gave was not a profit warning but an election: Democrats won control of both chambers of Congress on Associated Press projections, and investors said they feared tighter limits on data-centre building. That is their explanation, and we report it as theirs. Over the week the Nasdaq fell 3.4%, and the spread on US junk bonds rose to 3.48%, the widest of this run and just short of the 3.5% marker we set. The economy’s own data said nothing had broken. America added 165,000 jobs in October, more than three times the average of the past year, with August and September revised up by 84,000, and unemployment held at 4.1%.
The rest of the picture is mixed. The 10-year Treasury yield fell to 4.86% even as jobs beat, and the whole fall came through inflation expectations as Brent futures dropped more than 16% on hopes of de-escalation with Iran; real yields did not move. The Bank of England raised Bank Rate to 4.00% by eight votes to one. The US Treasury said it expects to hold auction sizes for several quarters while nearly doubling its buyback capacity, so our test of whether it is leaning on supply gets a split verdict and stays open to February. This week’s signal: Tightening Into Fracture — the political unwind, escalating. Confidence stays Medium, capped: the market, credit and jobs figures are confirmed, but the link from the election to the AI trade is investors’ attribution, not ours. Two tests would change our mind: hyperscaler free cash flow rising unexpectedly (not tested this week, none reported) and junk spreads falling back below about 2.8% (they are at 3.48%). The strongest reading against us is that Thursday was a one-day clear-out of a crowded trade: Friday’s rebound, calm in the riskiest tier of credit and a lower 10-year all support it. The checks we set for the following week were October consumer prices, CoreWeave’s results and the Treasury’s 3-, 10- and 30-year auctions.