The blue wave hits markets: stocks surge, oil drops, and the Iran war calculus shifts

The market moves on Wednesday are a clean example of how expectations do the work in financial markets, not just the events themselves. Prices do not wait for a war to end; they move the moment investors update their view of how likely that ending is. Before the vote, markets had priced in a Republican Congress that would back Trump's Iran strategy. When Democrats won, that scenario was taken off the table, and prices adjusted to the new probability. This is why the Dow's best day in eighteen months happened not because anything in the real economy changed overnight, but because the distribution of possible futures shifted.

The oil move is the channel worth following step by step. Brent crude fell because a Democratic Congress makes a prolonged or escalating Iran conflict less likely. Less conflict risk means less chance of supply disruption through the Strait of Hormuz, the narrow waterway through which roughly a fifth of the world's seaborne oil passes. More expected supply pushes the oil price down. Lower oil then feeds into lower inflation expectations, which makes central banks less likely to keep raising interest rates. Lower expected rates make bonds more attractive, so bond prices rise and yields, which move in the opposite direction to prices, fall. The dollar follows: when US rates are expected to stay lower, the return on holding dollars drops, so the currency weakens. One election result, four connected market moves.

The part I find genuinely uncertain is whether the market is right. A Democratic Congress can constrain Trump, but he retains executive power over foreign policy and the military. The 2018 midterms offer a partial parallel: Democrats took the House then, and markets initially rallied before realising that divided government did not resolve the underlying trade tensions with China. The Iran situation is different because it involves active military operations, where congressional leverage is stronger, but the precedent is a reminder that one election night's relief can fade when the structural problem does not go away. Whether this rally holds depends on whether diplomacy actually starts, not just whether Congress changes hands.

The Philippines is a useful case study in what economists call imported inflation, where rising prices are driven not by domestic demand being too strong but by the cost of goods bought from abroad. The country imports nearly all its oil. When Brent crude trades above $90 a barrel, fuel costs rise for every business that moves goods, generates power or runs vehicles. Those costs pass through to food prices, transport fares and utility bills. The central bank cannot produce more oil, so raising interest rates is a blunt instrument: it slows the domestic economy to reduce demand for imports, but it does not fix the supply-side cause.

The actor's dilemma here belongs to the BSP. Raising rates sharply will bring inflation down eventually, but it will also raise the cost of mortgages and business loans in an economy where many households are already under pressure from high fuel and food bills. The obvious pushback is that the BSP should wait and see whether the post-midterms oil dip develops into a sustained fall. That argument has some force: if Brent drops toward $85 over the next month as Iran war risk fades, the inflation peak may already be in. But central banks that wait too long for supply-side relief risk letting inflation expectations become entrenched, meaning people start to assume high inflation will continue and build it into wage demands, which then makes it self-fulfilling. One month of softer oil is not enough to take that risk.

The tension here is between two different readings of what a weakened Trump does next. The optimistic reading, which markets initially priced in, is that a Democratic Congress forces compromise and moderation across the board. The pessimistic reading is that a president who has lost domestic legislative power will double down on the one area where he still has it: foreign economic policy. Trade is almost entirely an executive function in the US system. Tariffs can be imposed under emergency powers without a congressional vote. Technology export controls are set by the Commerce Department. A president looking to project strength after a midterm loss has real tools available.

The trade truce between the US and China, an agreement to pause further tariff escalation while talks continue, is fragile precisely because it rests on both sides believing the other will hold. If Trump signals he is willing to escalate to distract from domestic losses, China's incentive to maintain the truce weakens. The 2019 to 2020 trade war showed how quickly business confidence falls when tariff uncertainty rises: firms delay investment, reroute supply chains and build up inventory as insurance, all of which raises costs. Whether this reading is right depends on whether Trump sees China policy as a place to recover political standing, or whether the Iran situation absorbs all his foreign-policy energy. That is genuinely unclear right now.