Dollar falls and Wall Street rallies as US election 'clips Trump's wings' - as it happened

Graeme Wearden

from on 2018-11-07 16:54 (#42DRH)

Gridlock on Capitol Hill reduces chance of further fiscal stimulus and tax cuts, economists say

4.54pm GMT

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%.

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.

4.11pm GMT

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.

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.

The Dow surges, pops above 50-day moving average as Mitch McConnell says he'll work with Pelosi on bills like infrastructure https://t.co/W3U5xvA9Uh pic.twitter.com/dyRwfHeyNV

3.53pm GMT

This is neat:

3.32pm GMT

The US dollar is still under pressure, maintaining its earlier losses against the British pound, the euro, the Japanese yen, and other major currencies.

The dollar index is currently down 0.5% today, close to the two-week low hit earlier.

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.

3.10pm GMT

Market #Midterms2018 reaction...pleased there's no surprises:
Stocks Up
Bonds Up
$ Down

3.08pm GMT

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

2.50pm GMT

2.49pm GMT

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.

"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.

2.34pm GMT

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.

2.02pm GMT

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!

1.20pm GMT

The US stock market is expected to rally when trading begins in around 70 minutes time.

The Dow is being called up around 215 points, or 0.8%, as investors take the midterm results in their strides.

We're expecting a large #DOW dividend adjustment of 32.5 pts this evening.

Early US Opening Calls:#DOW 25850 +0.82%#SPX 2782 +0.96%#NASDAQ 7093 +1.48%#IGOpeningCall

"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.

12.57pm GMT

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.

12.30pm GMT

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.

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.

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.

12.14pm GMT

Just in: The MSCI All-Country World Share Index, which tracks global stocks, has hit its highest level since 22 October.

12.08pm GMT

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?"

11.49am GMT

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.

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.

11.26am GMT

In the run-up to this week's elections, Donald Trump floated the idea of a new tax cut for America.

The idea looked highly speculative at the time, and has now been washed away by the Blue Wave of votes for Democratic candidates.

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.

11.04am GMT

If Donald Trump doesn't play ball with Congress, America could find itself facing another government shutdown.

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 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.

11.03am GMT

Mike Dolan of Reuters has created a neat chart, showing how asset prices have moved since America went to the polling booths yesterday.

As you can see, global stock markets (in yellow) are higher, as are European shares (green) and most emerging market currencies (in orange).

Dollar extends losses on US #Midterm2018 results - generally $, T-bond yields weaker; S&P futures and global stock prices higher, with emerging market currencies and equities doing particularly well pic.twitter.com/byB3oQfDZ1

10.29am GMT

This chart shows how the US dollar is the clear loser in the financial markets today, dropping against all major rivals:

USD weaker vs all of G10 this morning pic.twitter.com/nWveYax6EX

10.18am GMT

The US dollar is extending its earlier losses, and now down 0.6% against other major currencies as a new 12-day low.

Bloomberg says:

With Democrats winning the House of Representatives majority and Republicans clinching control of the Senate, President Donald Trump's party loses full control of Congress.

The results dim chances for any major fiscal initiative from the administration that might have triggered yield gains and hence a stronger greenback.

9.51am GMT

Mining giants are driving the London stock market higher, with Rio Tinto and BHP Billiton both up almost 3%.

"A decline in the dollar following the US midterm elections has given a welcome boost to the mining sector as it will be cheaper for many foreign companies to buy dollar-denominated commodities.

Tariffs implemented in September are due to rise from 10% to 25% on the 1 January 2019, and the President has also raised the possibility of putting tariffs on the remaining $250bn of Chinese imports that he has so far left untouched.

It may be that Trump adopts a softer stance in an attempt to get a deal on trade, thus allowing him to proclaim that he has 'solved' the China trade issue ahead of his 2020 re-election campaign.

9.40am GMT

You can keep track of all the midterm election results here:

9.28am GMT

Here are five lessons for investors from the midterm elections, from Neil Wilson of Markets.com:

9.10am GMT

Aaron Anderson, senior vice-president for research at wealth manager Fisher Investments, argues that the prospect of political gridlock is actually good for shares.

Legislation was hardly flying through Congress before midterms. Now with Democrats controlling the House of Representatives, the GOP increasing its majority in the Senate and President Trump in the White House, it will be nearly impossible to pass anything remotely controversial.

That will drive many people crazy, but markets love it. We should now have a long stretch where political risks go way down, which should be good for stocks."

8.55am GMT

Shares are roaring ahead in early trading in Europe, as investors react to the midterm election results.

In London the FTSE 100 has gained 80 points, or over 1%, to 7,119.

Having the president's wings clipped by losing control of the House is helpful for avoiding the most obvious "end of cycle policy mistakes" - which in our view is pumping more deficit spending and protectionism into the economy, forcing the Fed to tighten at a faster rate.

8.53am GMT

With the US dollar weakening fast, the pound has gained half a cent to $1.314 - a three week high.

The euro has been lifted to a two-week high, at $1.147.

"Nevertheless, domestic political unrest may throw a spanner in the works for the dollar, as Trump's relations with the Democrats will be essential in the coming months to determine the course of politics.

Potentially Trump, who was once a member of the Democratic Party, may manage to come together with the Democrats and agree on broad tax cuts for the middle class. This could be a boost for the economy and the dollar, assuming markets don't start to fret about the increasing government deficit. Chances are higher that the Democrats will seize the opportunity to use their new control of certain commissions in the House to step up the investigations in Trump's tax dealings, relations with Russia and claims of hush money payments.

8.16am GMT

Good morning, and welcome to our rolling coverage of the global economy, the financial markets, the eurozone and business.

"We rebuked Trump and Trumpism at a critical moment," Ilya Sheyman, executive director of the grassroots organisation MoveOn wrote in a celebratory email.

Many Democrats will be tempted to see the glass as half empty, engaging in self-flagellation over narrow defeats for some of its rising stars and a worse-than-expected loss of ground in the Senate. But the truth is that in the face of gerrymandering, voter suppression and an economy that continues to stay in the strong shape that Barack Obama bequeathed, the party reclaimed the House majority for the first time in eight years. That is no small achievement.

While not a great outcome for President Trump, it could have been worse. He clearly had plans to press on with infrastructure spending and further tax reform in the second half of his presidential term and while the policies are not dead, they are likely going to be curtailed or heavily revised by a Democrat-controlled House. Bi-partisanship will be required for progress to be made and for President Trump to generate a strong platform to defend his Presidency in 2020.

However, the US economy will face an increasing number of challenges over the next couple of years as support fades from the fiscal stimulus and weaker global growth (contributed to by President Trump's trade protectionism), a stronger dollar and higher interest rates provide increasing headwinds. A weaker economy and potentially falling asset prices and household wealth would compound the problems for President Trump.

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