Why the Midterms Matter for Market Liquidity | Macro Mondays: Nov. 2, 2026

Andreas said market stress was being amplified by a liquidity “plumbing” problem, alongside fears about AI and funding markets. Hedge funds’ notional exposure fell sharply in October in what he called probably the biggest deleveraging event in roughly 10 years. In that kind of degrossing, funds reduce gross exposure by selling long positions and buying back shorts. Positioning had been heavily long oil, short bonds, net short NASDAQ-related assets, and net long dollars, leaving crowded trades vulnerable to abrupt unwinds.

After a hot October PPI report, bond yields fell roughly 30–35 basis points about 30 minutes later, contrary to what the inflation data would normally imply, Andreas said. He viewed the move as evidence of forced positioning changes rather than a straightforward response to the report, and thought the deleveraging might be in its final hours. Further declines in oil prices could help restore confidence, though that was a possible support rather than a guaranteed resolution to market stress.

Oil fell sharply after Iran’s Ayatollah gave a green light to negotiations. Miguel said Iran may want an agreement partly to avoid a major U.S. attack after the midterms, but he did not expect a deal necessarily to be completed before the election. Iran appeared more willing to negotiate and might accept a lighter agreement with more concessions than the proposal discussed over the summer. Andreas compared the setup with late March and early April, while stressing that progress remained uncertain and did not mean the war was ending.

Prediction markets imply an average 12.7-percentage-point shift toward Democrats across contested seats compared with the prior election, a move one speaker described as extreme. That speaker doubted the apparent Democratic “blue wave” would hold and said a Democratic sweep of the House and Senate was already largely expected, which could limit its immediate market impact. A Republican rebound in the Senate was identified as the main positive surprise relative to current pricing, with Michigan among the states Republicans need to win. The speakers said extreme positioning across markets could make the midterms a rally trigger if election expectations prove wrong, but cautioned that a rally after the election could be attributed to the result even if it had nothing to do with it. Miguel also noted that the small number of midterm elections makes historical comparisons limited.

The lame-duck period could be more productive than the previous two years if the Trump administration advances 2027 appropriations, defense appropriations, and possibly debt-ceiling action before a new Congress convenes. Passing those measures could remove a significant market risk; failure could leave shutdown risks unresolved. A Democratic sweep, meanwhile, would make the next two years particularly difficult for Trump, including on appropriations.

On AI, one speaker said market participants broadly believe capital spending has gone far enough, but found that uniform pessimism striking given the sector’s growth. Technology was priced more conservatively than at the 2022 market bottom, in that speaker’s assessment. Compute constraints and rising GPU and data-center spot prices, including sharply rising B200 prices, were key considerations, while the speaker remained fundamentally positive on semiconductors. A strong ISM manufacturing reading was described as a first step toward better growth, and U.S. growth nowcasting was showing signs of life. The speaker thought semiconductor momentum could return within a month, while acknowledging that forecast could prove wrong.