European stock markets have closed solidly higher tonight, as a wave of relief sweeps through trading floors.
In London, the FTSE 100 has closed 76 points higher at 7117, up 1.1%.
The German Dax gained 0.8%, the French CAC rose by 1.1%, and the Spanish IBEX jumped by over 2%. Gridlock, it seems, is good for stocks today.
As David Madden of CMC Markets puts it:
Historically, equity markets have performed well out of a divided Congress as traders feel the government finds it difficult to get new laws passed, and therefore not much changes. The US economy had positive momentum going into the midterms, and that is likely to continue.
The rise in popularity of the Democrats could be construed as a vote against Trump’s tough trade stance, and perhaps the White House might soften its position regarding China. There is speculation the Democrats are keen to improve infrastructure, and we are seeing a rally in Caterpillar. Mr Trump has set his sights on tech giants like Amazon, and the outcome of the midterms might make it more difficult for him to go after tech titans.
The Dow is still 1.1% higher, the S&P 500 is 1,3% higher, while the Nasdaq is now 2.2% up.
Donald Trump is due to discuss the election results shortly, at a Washington DC press conference.
Wall Street is pushing higher, after the Republican’s Senate leader suggested the next Congress could take a bipartisan approach.
If that happened (and it’s a big if, given the last two years) it could help to get tax reform and infrastructure legislation passed.
Reuters has the details:
U.S. Senate Republican leader Mitch McConnell said on Wednesday infrastructure and healthcare would be on the U.S. Senate agenda in 2019, after Republicans widened their majority in the Senate but lost control of the House of Representatives in Tuesday’s elections.
Speaking to reporters, McConnell said senators would likely tackle Obamacare fixes and prescription drug prices, but that changes to Medicare and Social Security were unlikely.
Additionally, any new tax legislation would need bipartisan support, he said.
The US dollar is still under pressure, maintaining its earlier losses against the British pound, the euro, the Japanese yen, and other major currencies.
This is a clear reaction to the Democratic wins in the House of Representatives last night.
Investors are concluding that Donald Trump won’t be able to get another big tax cuts package through Congress, meaning less inflation and consequently less pressure to raise US interest rates in 2019 and 2020.
Jameel Ahmad, global head of currency strategy & market research at FXTM, says:
One of the more interesting trends to have monitored in the aftermath of the mid-term results is the acceleration in near-term Dollar weakness.
This suggests that investors are descaling away from heavy US dollar buying positions and have potentially been put off holding onto their positions because of the consensus that the Liberal Democrats taking control of the House provides a potential roadblock to President Trump introducing further fiscal stimulus.
Duncan Weldon, of UK investment firm Resolution Group, suggests that the midterm election results could trigger a heightened trade war with China:
Midterms thought: not helpful in terms of “trade war”. On two levels. 1. With domestic policy blocked, Trump is more likely to double down on what he can do without Congress - and that includes trade. 2. If I was a Chinese official, I’d be looking at these results & thinking 1/2
“He might be gone in 2 years, is now really a great time to concede? Why not wait it out”. I wouldn’t have thought that if the GOP had had a better night, I’d think “ok then, time for concessions”. 2/2
The Wall Street rally shows investors are relieved that the Democrats have control of the House of Representatives, and can block Donald Trump’s agenda.
Candice Bangsund, vice president and portfolio manager at Fiera Capital says investors would welcome a bit of gridlock, after two wild years in Washington:
“As widely expected, the US midterm elections have enabled the Democrats to take control of the House of Representatives, while the Republicans retained control of the Senate. This gridlock scenario has ramped-up the challenge for policymakers in seeking to pass major legislation.
That said, investor sentiment should be positive in general as a split Congress suggests that Democrats will be unable to roll back tax cuts or reinstate financial regulations, while the status quo for both the economy and the markets should ultimately prevail. As such, global equities are mainly higher this morning as the passage of last night’s events has likely removed an element of uncertainty from the marketplace.
The Wall Street opening bell is ring-a-dinging.....and shares are rising.
The Dow Jones industrial average, the broader S&P 500 and the tech-focused Nasdaq index have all posted solid gains, as traders react to the midterm elections.
My US colleagues have launched a new liveblog covering all the reaction to the midterms.... including this typically presidential threat from Donald Trump:
If the Democrats think they are going to waste Taxpayer Money investigating us at the House level, then we will likewise be forced to consider investigating them for all of the leaks of Classified Information, and much else, at the Senate level. Two can play that game!
Geoffrey Yu of UBS Wealth Management says investors may move money into riskier assets, now the US election is over.
“US stock futures edged up this morning, signalling the market sees Republicans as having marginally outperformed. For once, the polls were pretty much on track, but the pundits have been careful to manage expectations after 2016’s miscalculations, which on balance is probably a healthy development.
“From an economic standpoint, the more gridlock can be avoided the better. We will be interested to see whether certain sectors can benefit from this outcome, such as infrastructure.
Investors around the globe are relieved that the Republicans lost their grip on the lower House of Representatives, says Jake Robbins, fund manager at Premier Global Alpha Growth Fund.
A divided government has some positives for markets in that the more extreme policies of the Trump presidency will certainly see some push back which financial markets are clearly seeing as a positive.
The great fear was a surprise hold by the Republicans in congress which would have allowed Trump’s combative foreign and trade policies that have so unnerved markets to escalate further. Financial markets are breathing a sigh of relief that this is not the case. Those sectors hit hardest by tariffs such as basic materials, semis and industrials should see some respite, particularly given their underlying growth prospects have remained pretty good and after the selloff these sectors look attractively valued.
Political gridlock also means there’s little chance that Donald Trump’s original tax reforms are reversed.
Democrats on the Hill might want to repeal those tax cuts, but the Republican-controlled Senate surely won’t allow it.
There’s another reason that shares are rallying today [the cuts to corporate tax boost company profits].
Mickey Levy and Roiana Reid of Berenberg explain:
Financial markets are expected to take comfort with the split power in Congress: it was widely expected and will be perceived to allow for additional checks and balances on President Trump. The decent election results for Republicans in the Senate should lessen perceptions of a shift to the hard-left in the 2020 elections and ease concerns about a roll-back of pro-business policies.
They also believe we’ll see a lot more political rancour in Congress, but rather less meaningful legislation:
We expect even more Congressional dysfunction ‑ if that is possible ‑ to lead to more convolutions in the already dysfunctional budget process and more threats of government shutdowns.
Paras Anand of Fidelity International has an optimistic take - Donald Trump could work with the Democrat-controlled House to push through a new infrastructure-spending package.
He writes:
During the 2016 Clinton election campaign, infrastructure spend was high on the Democrat’s policy agenda (as it was for Trump). It is possible that with a bi-partisan focus on the pent-up need for domestic infrastructure investment, the Democrat view on the budget deficit may change from opposition (to tax cuts) to accommodation (spending on roads, hospitals, airports).
“Any development in this direction would further spur the overall economy, continue to push wages in an already tight labour market, and potentially challenge the current expectations around the Federal Reserve’s activity for next year. Most political events have an underwhelming economic impact - could the US midterms prove the exception?”
The outcome of the US midterms has been met with relief by financial markets. says Silvia Dall’Angelo, Senior Economist at Hermes Investment Management.
However, it may not last long..
Equities and bonds rallied, while the US dollar weakened. Following the correction in equities markets in October, the lift of the uncertainty surrounding the US mid-term elections paves the way for a solid performance of financial markets into year-end.
But that could change in 2019 as fundamentals look less supportive and prospects are more uncertain.
She also reckons Donald Trump will face a tougher task getting reelected in 2020, as a Democrat-controlled House may launch new probes into the president:
The most significant consequences of the US mid-term elections concern the domestic political landscape. Indeed, a divided Congress means President Trump will have a hard time to get his domestic policies approved; in particular, his promised new round of tax cuts will probably never see the light.
In addition, Democrats controlling the House will probably use subpoena powers to widen investigation into issues such as Russian interferences in the 2016 elections. All this will make for a challenging environment for President Trump to operate in, lowering his chances of winning a second term in 2020.
The idea looked highly speculative at the time, and has now been washed away by the Blue Wave of votes for Democratic candidates.
Mohamed El-Erian, chief economic adviser at Allianz, says the tax cut simply won’t happen. That’s good for US fiscal stability, and means Treasury bonds are rallying today (a tax cut would widen the deficit, meaning more government borrowing).
The 4 basis point drop in yield on 10-year US government #bonds, and the weaker #dollar that comes with that, make sense: The split #Congress outcome of the #MidtermsElections2018 puts an end to the notion of another #tax cut. More interesting is the rally in #stocks.
An employee of a foreign exchange trading company in Tokyo today Photograph: Toru Hanai/Reuters
If Donald Trump doesn’t play ball with Congress, America could find itself facing another government shutdown.
So warns Andrew Hunter, US economist at Capital Economics.
He told clients this morning the risk of a shutdown has risen.
Trump has issued plenty of threats to shutter the government in order to extract funding for his border wall or to rein in non-defence spending, and the risks are surely higher now that he can blame the Democrats.
The first flashpoint could come in early December, Hunter explains, when the current government funding bill is due to expire. The big clash could arrive in early 2019, if Congress can’t agree to raise the debt ceiling.
Hunter says:
The big risk would be a failure to raise the federal debt ceiling when the current suspension expires next spring, which would raise the possibility of a “technical” default.
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