Summary
On Tuesday night during this year’s US midterm election, voters were not the only ones waiting for results. Investors in Asia, Europe, and on Wall Street—who had predicted a divided government in Washington—priced in the potential for political gridlock between the House and the Senate. So when results showed the Democratic Party winning the House of Representatives and the Republican Party maintaining their dominance in the Senate, investors were unsurprised and trading remained tame.
Market results, however, were as mixed as electoral ones: while markets in Tokyo, Shanghai, and Japan fell after Democrats won the House, European markets traded at around 1 percent higher. Markets took a downturn in China, where the ongoing trade war with the US has harmed China’s economic health. Stocks in the country closed 0.7% lower as election predictions became reality.
The loss of the House to the Democratic Party could have implications on President Trump’s trade war with China, as it signals American voters’ dissatisfaction with his policies, introducing the potential for a shift in his administration’s economic strategy. However, because Trump has the power to make decisions about trade without consulting the House or the Senate, it is uncertain whether the economic tensions between China and the US will subside—even with a Democrat-controlled House.
Even so, the now-Democratic majority in the House could induce other effects on the global economy: investors anticipate that it could prevent Trump’s efforts to cut regulations within the financial industry, especially environmental ones. The split Congress could have positive effects as well: as Deutsche Bank’s chief international economics, Torsten Slok, commented: “A split Congress has historically been bullish for equities. We expect to see the same pattern again.”
The Election Showed a Divided Country. Investors Can Live With That.
Investors on Wednesday appeared to take the prospect of a divided government in Washington in stride, as Asian markets closed mixed, European markets gained ground and Wall Street looked set for a positive opening.
Markets in Tokyo and Shanghai fell slightly the day after the Democratic Party won a majority in the United States House of Representatives. In Europe, the major stock markets were trading about 1 percent higher.
The election results were largely as expected, and trading was tame.
The potential for political gridlock, as President Trump faces a House controlled by Democrats, has already been priced in, said Geoffrey Yu, head of the United Kingdom investment office at UBS Wealth management.
“The pundits and the pollsters called it right,” Mr. Yu said. The appetite for stocks, reflected in the rising indexes, he added, “suggests the Republicans performed slightly better than expected.”
In Asia, markets slumped the most in China, where slowing economic growth and the trade war with the United States have been the main market drivers in recent months. Stocks there closed 0.7 percent lower on Wednesday. The Nikkei in Japan closed down less than half a percentage point, while the Hang Seng in Hong Kong ended the session slightly higher.
Futures that track stocks in the United States signaled a small bump could be in the works on Wednesday morning. Futures that track the S&P 500 were up 0.6 percent.
Investors see a Democratic-controlled House as an obstacle to Mr. Trump and his efforts to cut regulations affecting the finance industry and the environment, though it is unlikely to have a major effect on the United States economy. The Senate remains in Republican control, where the party gained seats in rural areas where Mr. Trump has strong support and where he campaigned in the last few weeks.
“Their implications are likely to be confined to shaping the regulatory and fiscal environment for specific sectors, notably financials and industrials,” UBS said in a note on Tuesday.
And it could lift the markets. Torsten Slok, Deutsche Bank’s chief international economist, noted that “a split Congress has historically been bullish for equities, and we expect to see the same pattern again.”
The impact on Mr. Trump’s trade war with China is less certain. The loss of the House to the Democratic Party represents a blow to the Republican Party and to Mr. Trump, and it signals dissatisfaction with his leadership. At the same time, Mr. Trump has wide latitude to act by himself on trade without input from Congress, and some Democratic lawmakers are sympathetic to his attitude toward Beijing.
Investors will be looking toward the next Group of 20 summit meeting, at the end of November, with that in mind, said Mr. Yu of UBS. “People are going to be less negative, relatively optimistic,” as they head toward that, he said.
Source: The New York Times, Amie Tsang and Carlos Tejada, Nov. 7, 2018. Photo credit to Hamodia .