US midterms: What Trump's defeat means for Europe and global markets
By Piero Cingari ·
Donald Trump has suffered one of the worst defeats of his political career, after Republicans lost control of both chambers of Congress to the Democrats in a vote that turned into a verdict on his presidency.
By 10:05 CET, Democrats had won 228 seats in the House of Representatives, ten more than the 218 needed for a majority, against 139 for the Republicans, with dozens of races still to be called.
In the Senate, they took seven seats from the Republicans, including 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 it as a hit on me."
He also made clear he would use his veto to block the Democrats' agenda, posting a picture 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 how much can a Democratic Congress really change for Europe and for markets?
Will a Democratic Congress end the tariff threat to Europe?
Probably not, because Trump's tariffs no longer depend on Congress.
After the Supreme Court struck down his emergency tariffs in February, the administration moved them under Section 301 of US trade law. That route lets the president act without a vote by lawmakers.
Democrats can hold hearings and slow down his nominees, but they cannot easily take that power away.
James Smith, developed markets economist at Dutch bank ING, believes a divided Washington could even push the president to rely on it more.
"Like foreign policy, trade is another power the president can wield unilaterally without Congress," Smith said in a note before the vote.
He did not rule out new tariffs aimed at Europe, which he said would matter a lot for US inflation and for the Federal Reserve.
What happens to US support for Ukraine?
Democrats will chair the Senate committees and decide which of Trump's nominees get confirmed when the new Congress takes office in January. Many of them also want to approve new money for Ukraine.
The harder part is getting that money spent. Over the past two years, the White House has cancelled funds already approved by Congress by holding them back until the end of the fiscal year, when they expire.
"In practice, this means that a Democratic Congress could write money for Ukraine or development aid into law and the president might not spend it," Nevada Joan Lee, policy fellow at the European Council on Foreign Relations, said in a commentary last month.
Her advice to European governments is to count only on money that actually arrives.
"Europeans should treat earmarked funds as intent, not commitment," Lee said.
How did markets react?
After a nervous start, European stocks turned higher.
By 10:00 CET, the Euro Stoxx 50 was up 0.8% and Germany's DAX 0.6%, while Spain's IBEX 35 jumped 1.6%. US stock futures also recovered, with contracts on the S&P 500 up 0.2%.
Banks led the gains, as investors moved back into 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, also rallied. Danish wind farm developer Ørsted jumped 7.3%, and turbine maker Vestas gained 5.2%.
Defence stocks went the other way. Investors fear a Democratic Congress could slow the rise in US military spending that Trump has pushed for, and many European arms makers also sell to the US armed forces.
BAE Systems fell 5.2%, Hensoldt 4.9%, Thales 4.5%, Saab 3.8%, Rheinmetall 3.2%, Dassault Aviation 2.8% and Leonardo 2.7%.
Precious metals were among the biggest winners. Gold rose 2.7% to $4,035 an ounce, back above $4,000, and silver climbed 4% to $51.76.
The euro gained 0.5% to $1.1247, as the dollar weakened against other major currencies.
US government bonds 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%. Germany's 10-year Bund yield was little changed at 3.33%.
Bitcoin rose 1.3% to about $78,300, and Brent crude traded near $104 a barrel.
Is a divided Washington good for investors?
Markets have usually liked it. When the White House and Congress disagree, fewer big laws get passed, and that means fewer surprises.
History also favours bondholders. In the three months after past midterm elections, 10-year Treasury yields have fallen by about 20 to 25 basis points on average, according to Luca Bindelli, head of investment strategy at Swiss private bank Lombard Odier.
"We think that a Democratic sweep would be neutral to mildly positive for the fiscal outlook. Congress could restrain Trump's expansionary agenda and, with it, the deficit," Diego Barnuevo, 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 could be different," Yardeni said in a note on Monday.
His concern is the debt ceiling, the legal cap on how much the US government can borrow. A divided Washington will still have to agree to raise it, and a long fight over it could push borrowing costs up rather than down. Barnuevo expects the limit to become binding at some point in 2027.
What next for the euro?
Currency analysts doubt the election will change much for long. For the dollar, the Federal Reserve still matters more than Congress.
"The greenback continues to respond predominantly to the Fed story, which shouldn't face an immediate and direct impact from the midterm result," Francesco Pesole, FX strategist at ING, and his colleagues said in a note on Tuesday.
The euro also has problems of its own. Energy prices are still high largely due to the war with Iran, ING expects eurozone inflation to stay around 4%, and investors are demanding more to hold 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 pen will still be on the desk.
Originally published by Euronews Business