A Democratic Party sweep of the US Congress rippled across global markets, sending the dollar lower and boosting US bonds, while stocks steadied on bets the outcome will put the brakes on president Donald Trump’s agenda.
Futures for the S&P 500 and Nasdaq 100 were little changed. Both had fallen earlier before buyers stepped in. The dollar weakened against all significant peers, while the yield on 10-year Treasuries fell five basis points to 4.92 per cent. Europe’s Stoxx 600 rose 0.4 per cent while a gauge for Asian equities wavered.
Investors initially saw a Democratic wave as a potential setback for stocks given the prospect of tighter regulatory scrutiny, particularly of high-growth technology and artificial intelligence companies. Treasuries, meanwhile, stand to benefit if political gridlock limits further tax cuts and government spending, easing concerns about federal borrowing.
Democrats scored victories in Republican strongholds across the country, flipping at least seven Senate seats and winning House races in districts Republicans easily carried in 2024.
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Several news organisations projected that Democrats would win the House, while Decision Desk HQ projected they took the Senate. Trump said he could work with a House and Senate run by the opposition “if the Democrats want to work with me.”
“Political gridlock should reduce the likelihood of another significant fiscal expansion, while the accompanying decline in Treasury yields could ultimately provide some support to equities,” said Florian Ielpo at Lombard Odier Investment Managers.
“The fundamental backdrop has not suddenly changed, with US growth remaining solid.”
“The US midterms, like any significant political event, have created uncertainty, widening the disconnect between market valuations and fundamentals,” said George Efstathopoulos, a money manager at Fidelity International.
“I am now trimming defensive positions, including utilities, to buy technology stocks in Asia and elsewhere, while adding some exposure to India for diversification.”
Bond investors have been uneasy about the US’s fiscal trajectory, with the nation’s debt load at around $40 trillion (€35.16 trillion), and gridlock may reduce the risk of additional spending or tax cuts that would require more Treasury issuance.
“Democratic control of Congress will make it harder for the White House administration to pass significant partisan legislation,” David Chao, a global market strategist at Invesco Asset Management, wrote in a note. “Less fiscal stimulus could reduce upward pressure on US growth, inflation and Treasury yields.”
In currency markets, the New Zealand dollar was the biggest gainer among significant markets versus the dollar, rising 0.7 per cent, while the yen and euro both strengthened 0.4 per cent.
“The US dollar’s Achilles’ heel is being exposed,” with its fortunes tied to the AI boom, said David Forrester, a senior strategist at Credit Agricole CIB in Singapore. “A Democrat blue wave that stifles data centre buildouts and hobbles the AI boom would weigh on the US dollar.”
Bitcoin slipped as much as 2.8 per cent on concerns that a Democratic sweep could stall industry-backed legislation and bring tougher scrutiny of digital-asset firms. The cryptocurrency later erased all of its declines.
Meanwhile, Oil fluctuated after a two-day decline as traders weighed mixed signals on the trajectory of US-Iran peace talks.
Brent traded near $104 a barrel after swinging in a range of more than $6 on Tuesday. West Texas Intermediate was around $97. Tehran and Washington are reviewing fresh proposals from mediators on how to resolve their differences, according to a diplomat briefed on the matter. Still, Iran’s national security chief said on X that the US response has so far been “not satisfactory.”
The latest diplomatic efforts follow weeks of heightened tensions, with Iran stepping up attacks on ships in the Strait of Hormuz and US President Donald Trump threatening renewed strikes after the midterms. Oil tumbled on Monday on signs of progress, but choppy trading returned Tuesday as deep divisions cast doubt on a breakthrough.
Global benchmark Brent has surged more than 70 per cent this year as the nine-month war disrupted flows from the Gulf and upended energy markets. Diesel and gasoline prices have also rallied, including in the US, potentially influencing the outcome of the midterms. - Bloomberg
