by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with an analysis of Tuesday’s electoral contests. We then delve into the factors driving the recent cryptocurrency sell-off. Further coverage includes the continuing government shutdown, the EU’s relaxation of certain climate rules, and the escalation of US-Venezuela tensions. A summary of key domestic and international data releases is also included.

Democratic Sweep: In the first major electoral test of the cycle, strong Democratic turnout secured critical gubernatorial wins in Virginia and New Jersey. The party’s momentum extended down-ballot, with voters in New York electing Democratic Socialist Zohran Mamdani as the city’s next mayor and a key Pennsylvania Supreme Court race also falling in their favor. Overall, these outcomes suggest that voter dissatisfaction with the status quo is high — even with a relatively good economy — signaling a potentially contentious midterm election.

• The Democratic wins immediately intensify the national redistricting battle ahead of the 2026 midterms. Following partisan map-redrawing efforts in Republican-led states like Texas and Missouri, California responded by advancing Proposition 50. This ballot measure would allow the state to suspend its independent commission and implement new, legislatively drawn congressional maps to gain Democratic seats, effectively escalating a state-by-state partisan “arms race” for control of the US House.
• Given the White House’s “build fast and fix later” strategy, there is speculation that the administration could seek to inject additional stimulus into the economy. Such a move would likely be aimed at boosting economic sentiment to help the party in power retain control of both houses of Congress. This approach is consistent with current efforts to expand Medicare coverage for pharmaceuticals and pressure drug companies to lower prices, which are popular, consumer-focused policies.
• While the recent Democratic win might superficially suggest a shift in partisan allegiance, we propose a more fundamental driver: the global trend of electoral dealignment fueled by rising income inequality. Consequently, we anticipate that established political parties will be increasingly compelled to calibrate their platforms, adopting policies that appeal to lower-income households without alienating their wealthier base, a strategic maneuver essential for maintaining broad coalition support.
• That said, the broader political environment is poised to be favorable for equities leading up to the 2026 midterm elections. The administration is expected to utilize its policy levers for additional fiscal stimulus. Critically, the impact of the recent tax bill — likely generating larger tax refund checks for consumers and incentivizing greater capital investment — should provide a material boost, further fortifying an economy that has demonstrated consistent resilience.

Bitcoin Doubts: On Tuesday, bitcoin plunged below $100,000, a critical support level not seen since late June. This sustained decline is largely driven by long-term holders executing a risk-off strategy, having liquidated over $45 billion in holdings in the past month. The sell-off highlights a pivotal shift for the digital asset, which has recently gained popularity among retail investors while also attracting institutional flows due to recent regulatory changes.

• Although a single catalyst remains elusive, the recent downward pressure on crypto assets appears to stem from a confluence of three key factors: tech-sector deleveraging, a persistent liquidity crunch in the repo market, and growing interest in potential quantum-based alternatives to current blockchain protocols.
  • Tech Narrative: Over the past few years, bitcoin has exhibited an increasingly strong correlation with technology equities. According to CME Group, bitcoin’s 60-day correlation with the Nasdaq 100 has risen from its near zero level prior to 2020 to as high as 60% over the past two years. This trend suggests that a portion of the skepticism surrounding crypto may reflect broader shifts in sentiment toward the technology sector as a whole.
  • Repo Problem: Recently, there has been a rise in liquidity stress within the crucial repo market. This environment has forced various financial institutions to increasingly tap Federal Reserve facilities, such as the Standing Repo Facility and the Discount Window, to meet short-term funding needs. While there is no definitive link, the highly liquid nature of certain digital assets makes them prime targets for institutions needing to quickly raise clean capital
  • Quantum Hype: Adding to long-term uncertainty is the emergence of “quantum money,” a theoretical alternative to code-based blockchain systems that would secure ledgers through the laws of physics rather than cryptography. Though still conceptual, recent breakthroughs in quantum technology — especially the release of specialized hardware like the Willow Chip — have fueled speculation about the eventual obsolescence of current cryptographic infrastructure.
• Of the three possibilities, the most concerning is that the crypto sell-off signals underlying liquidity strain. If confirmed, this could point to a broader systemic issue. While it is worrisome, the Federal Reserve does possess the necessary tools to manage such liquidity pressures. Therefore, we do not expect this specific issue to have significant long-term repercussions on the broader market.

Tech Skepticism: The tech sell-off persisted as mixed earnings reports dampened sentiment in the AI sector, keeping investors focused squarely on quarterly results. On Tuesday, chipmaker AMD beat expectations but offered weak guidance, and Super Micro Computer failed to excite investors with earnings that fell short of forecasts. The disappointing performance from these companies highlights the growing expectations for AI-related firms (particularly those outside of established tech giants) despite concerns over high valuations and weak underlying fundamentals.

Shutdown Tensions: The US government shutdown is now the longest on record, but a bipartisan compromise is finally emerging among centrist senators. The proposed deal involves immediately reopening the government with a short-term bill. In exchange, Republican leadership would commit to holding a dedicated vote on the expiring Affordable Care Act premium subsidies. This shift towards accepting a promise to vote, rather than a guaranteed extension, signals growing post-election momentum to resolve the standoff.

EU Soft Regulation: The European Union has agreed to scale back its ambitious 2040 climate targets following 18 hours of intense negotiations. The revised plan lowers the carbon emission reduction target to 90% and includes key concessions, such as delaying the expansion of its carbon pricing system and permitting member states to outsource a portion of their emission reductions to other countries. This policy shift is viewed favorably for European equities, as it reduces the near-term regulatory burden on domestic industries.

Venezuela Pressure: Venezuelan President Nicolás Maduro is escalating domestic repression in response to heightened US pressure over alleged drug trafficking. This American pressure, which has manifested as a ramped-up Caribbean military presence under the guise of anti-narcotics operations, is widely viewed as a modern echo of the Monroe Doctrine. This effort to reassert hemispheric dominance and deter states like Venezuela from partnering with China carries a real risk of escalation.

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