Brent crude fell after Democrats won both chambers of Congress, lifting hopes that Trump will seek a deal to end the Iran war. Market watchers say that could curb interest rate hikes next year, but oil, U.S. growth and fiscal policy remain uncertain.
Oil prices dropped after the Democratic victory in the U.S. midterms, and market watchers say the result has the potential to curb interest rate hikes globally next year. The Federal Reserve, Bank of England, European Central Bank and Bank of Japan have all raised rates in recent months, partly because the U.S. and Israel's war with Iran pushed up oil and gas prices.
International benchmark ICE Brent crude fell 8.7% on Wednesday, closing below $100 a barrel for the first time since September. The drop was largely attributed to expectations that Trump may be more inclined to strike a deal to end the war.
Oil climbs back as a peace deal stays uncertain
Oil began to climb back up on Thursday, and AJ Bell's Dan Coatsworth noted that interest rate expectations have not radically changed from pre-election levels.
Bank of England Governor Andrew Bailey, whose bank hiked rates by 25 basis points on Thursday, said energy pressures stem from obstructions on the Strait of Hormuz, a shortage in refining capacity and low European gas storage. He told CNBC: "A peace process in the Middle East will not shift all of those elements."
Bank of America's Ralph Axel said higher oil prices over the next three to six months would likely mean significantly higher interest rates in the U.S., and especially in the U.K. and Germany.
Fiscal policy and AI spending shape the Fed's path
Beyond oil, analysts point to U.S. spending. J.P. Morgan's James Sullivan called the level of fiscal stimulus the million dollar question right now. If it changes, he said, the Fed could gain significantly more forward flexibility.
Rabobank's Jane Foley cautioned that it is very early to be sure of the fiscal outlook, because many Democrats were voted in to soften cost of living pressures.
Baird Strategas' Daniel Clifton said tighter fiscal policy combined with a slowdown in AI capex could lead to a policy mistake in mid-2027. His forecast is not for a U.S. recession but for a mid-cycle slowdown in 2027.
Source: CNBC
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