AI Trade Loses Its Washington Tailwind

Macro

Last week was a bit of a rollercoaster as the Democrats won the House and Senate in the U.S. midterm elections. What started as an initial bullish reaction on Wednesday quickly faded, as the market clocked that a Democratic Congress puts regulatory risk back into an AI trade which had been pricing in a Washington tailwind.

As a result, the S&P 500 fell 4.4% on Thursday, its worst day since April 2025 (Trump tariffs). Looking across assets, crypto ended lower as well, now sub $75k, as it got dragged down with the risk-off move. Oil also sold off, with Brent down 13% on the week, its steepest drop since 2020, because the midterm result raised hopes of Iran de-escalation and the war premium came out of the price, although we would not bank that relief with talks still short of a breakthrough. Gold is up 4.5% on the back of a softer dollar midweek and money rotating out of AI stocks into defensives.

Something missed in last week’s activity is that friday’s payrolls came in at 165k against a consensus of roughly 60k, and a December hike is now about 77% priced, up from 67% a week ago. We think the market is right to take it seriously, since wages are running hot enough that the Fed has no reason to wait for equities to settle. A hike into an AI-led drawdown is the setup crypto handles worst, as it pulls liquidity and risk appetite at the same time.

Looking at energy, Brent is back near $96 this morning after Trump said further strikes on Iran are highly unlikely if talks progress, but with Rubio seeing no breakthrough we would treat that as headline noise and not a trend. October CPI also predates the drop in oil, so Tuesday’s print cannot show any of the relief, and the first real test of it comes with the November data.

On top of the regulatory pressure, bellwether Nvidia is down about 5% premarket after its board opened an independent investigation into reports that Jensen Huang was targeted by a foreign intelligence effort. The board says he stays on as CEO and that it has no reason to believe national security or company secrets were compromised, but this lands a week before earnings on November 17, which turns that print into a bigger test of the AI trade than it was on Friday.

Digital Assets

With any clear catalyst for crypto out of the way, it clearly resumed its correlation to macro and equities.BTC spiked to $81k on Wednesday as oil and equities rallied, then gave all of it back by Friday once both reversed, which tells us the move was bought on macro relief and not on conviction. Sunday’s flush to $73.5k stopped just above the 200-day average near $73k, which has not seen a daily close below it since August. The weekly close also slipped just under the 50-week average at $75.5k, ending a seven-week run above it.

Spot BTC ETFs lost $1.28B, the most since June and enough to wipe out the year’s net inflows, with Wednesday the only session in which either BTC or ETH funds saw money come in. Until that flow turns, we think every bounce in BTC is positioning and not new capital.

Over $1B of positions were liquidated into Monday, with ETH taking more than BTC despite being a fraction of the size and almost all of BTC’s liquidations being longs. Leverage was positioned for a bounce the weekend did not deliver, and we think the flush is a mild positive, since it removes longs that would otherwise be forced sellers on the next leg lower.

Altcoins sold harder than BTC, with NEAR, HYPE, ENA, LIT,... down double digits against roughly 4% for BTC, and we expect that to continue as the second half of the recent bounce was wealth recycling and not new money. ZEC was among the few large caps higher although some of that strength seems to fade this morning. ZEC holding up while the tape bleeds tells us privacy is the one narrative that still has a bid.

Gold gained 4.5% in the same week, so the defensive bid was there and bypassed crypto, which is why we think BTC keeps trading as a high-beta liquidity asset until the rates and AI overhangs clear.st before it means more than a headline reaction.

Our take:

“We stay cautious while BTC sits under its 50-week average, with $68k the next level down and reclaiming $80k changing that view"

As flagged last week, $73k was the first level to watch, and Sunday’s flush stopped just above it. A daily close below it and the 200-day opens $68k, and we would expect the altcoins that rallied hardest after mid-September to take the brunt of that move, as they had the least basis to be up. Our medium-term view is unchanged. Privacy, perp DEXs and prediction markets are holding up in a tape this weak, and the bluechips in those themes are where we would look to step in during a flush rather than today.

We turn constructive on a daily close above $80k that holds, plus a net-inflow week for spot BTC ETFs.

Tuesday’s October CPI is the first test, with core expected at +0.2%. We think even a benign print would not take a December hike off the table given the wage data, so it buys a few bounce days and not a trend. Cisco and Applied Materials report Thursday, PPI follows on Friday, and Nvidia reports Tuesday, November 17 under the board investigation. The FOMC meets December 8-9, where a hike is now about 77% priced.