Donald Trump suffered one of the worst defeats of his political career, after Republicans lost control of both houses of Congress to Democrats in a vote that turned into a verdict on his presidency.
ADVERTISEMENT
ADVERTISEMENT
As of 10:05 a.m. BST, Democrats had won 228 seats in the House of Representatives, ten more than the 218 needed for a majority, compared to 139 for Republicans, with dozens of elections still to be called.
In the Senate, they took seven seats from the Republicans, notably in Texas, Ohio, Kansas and Maine.
High prices weighed heavily on voters. About two-thirds said in an Election Day survey that Trump’s tariffs had hurt the economy.
The president said he would accept the results, but added: “I don’t view this as an attack on me.”
He also made it clear that he would use his veto to block the Democrats’ agenda, posting a photo of a red cap with the word “VETO” stitched on it. But he also told the New York Times that he was willing to work with Democrats.
So, to what extent can a Democratic Congress really change for Europe and for the markets?
Will a Democratic Congress put an end to the tariff threat weighing on Europe?
Probably not, because Trump’s tariffs are no longer up to Congress.
After the Supreme Court struck down its emergency tariffs in February, the administration placed them under Section 301 of the U.S. Trade Act. This path allows the president to act without the vote of lawmakers.
Democrats can hold hearings and slow down his nominees, but they can’t easily take away that power.
James Smith, a developed markets economist at Dutch bank ING, said a divided Washington could even push the president to lean more on him.
“Like foreign policy, trade is another power that the president can exercise unilaterally without Congress,” Smith said in a memo before the vote.
He did not rule out new tariffs targeting Europe, which he said would be very important for American inflation and for the Federal Reserve.
What is happening to US support for Ukraine?
Democrats will chair Senate committees and decide which of Trump’s nominees will be confirmed when the new Congress takes office in January. Many of them also want to approve new funds for Ukraine.
The hardest part is spending the money. For the past two years, the White House has canceled funds already approved by Congress by withholding them until the end of the fiscal year, when they expire.
“In practice, this means that a Democratic Congress could write into law money for Ukraine or development aid and the president might not spend it,” Nevada Joan Lee, a policy fellow at the European Council on Foreign Relations, said in a commentary last month.
His advice to European governments is to rely only on money that actually arrives.
“Europeans should view earmarked funds as an intention, not a commitment,” Lee said.
How did the markets react?
After a nervous start, European stocks rose.
At 10:00 CET, the Euro Stoxx 50 was up 0.8% and Germany’s DAX was up 0.6%, while Spain’s IBEX 35 had jumped 1.6%. U.S. stock futures also rallied, with S&P 500 contracts up 0.2%.
Banks led the gains, as investors turned to lenders focused on their home markets. Deutsche Bank rose 3.6%, Intesa Sanpaolo 3.3%, Commerzbank and Société Générale 3.1% each, while Santander and UniCredit gained 3%.
Clean energy companies, which suffered under Trump’s policies, have also recovered. Danish wind farm developer Ørsted jumped 7.3% and turbine maker Vestas 5.2%.
Defense actions followed an opposite trajectory. Investors fear a Democratic Congress will slow the rise in U.S. military spending that Trump has pushed for, and many European arms makers also sell to the U.S. armed forces.
BAE Systems fell by 5.2%, Hensoldt by 4.9%, Thales by 4.5%, Saab by 3.8%, Rheinmetall by 3.2%, Dassault Aviation by 2.8% and Leonardo by 2.7%.
Precious metals were among the biggest winners. Gold rose 2.7% to $4,035 an ounce, back above $4,000, and silver rose 4% to $51.76.
The euro gained 0.5% to $1.1247, while the dollar weakened against other major currencies.
US government bonds have rallied. The 10-year Treasury yield fell 3.7 basis points to 4.93%, the 2-year yield to 4.61% and the 30-year yield to 5.30%. The yield on the 10-year German Bund was little changed at 3.33%.
Bitcoin rose 1.3% to around $78,300 and Brent crude traded near $104 a barrel.
Is a divided Washington good for investors?
The markets generally appreciated it. When the White House and Congress disagree, fewer big laws are passed, which means fewer surprises.
History also favors bondholders. In the three months since the last midterm elections, 10-year Treasury yields fell by about 20 to 25 basis points on average, according to Luca Bindelli, head of investment strategy at Swiss private bank Lombard Odier.
“We believe a Democratic victory would be neutral to slightly positive for the fiscal outlook. Congress could constrain Trump’s expansionary agenda and, with it, the deficit,” Diego Barnuevo, a market analyst at payments company Ebury, said in emailed comments.
Ed Yardeni, president of Yardeni Research, is more cautious.
“Wall Street traditionally welcomes political gridlock because it reduces the likelihood that Congress will pass extremist legislation. But this time might be different,” Yardeni said in a note Monday.
His concern is the debt ceiling, the legal limit on how much the U.S. government can borrow. A divided Washington will still have to agree to raise it, and a long fight over it could drive up borrowing costs rather than lower them. Barnuevo expects this limit to become binding by 2027.
What future for the euro?
Currency analysts doubt the election will change much in the long term. For the dollar, the Federal Reserve still matters more than Congress.
“The greenback continues to react primarily to the Fed story, which is not expected to face an immediate and direct impact from midterm results,” Francesco Pesole, FX strategist at ING, and colleagues said in a note Tuesday.
The euro also has its own problems. Energy prices remain high, largely because of the war with Iran, ING expects eurozone inflation to remain around 4% and investors are demanding more holdings of French government bonds.
The new Congress takes office in January. Until then, Trump retains Republican majorities in both chambers, and even after that, his veto will still be on the desk.
Gn world
