European stock markets cheer as US elections leave Congress divided

European stock markets cheered the ...

Posted: Nov 7, 2018 1:30 PM
Updated: Nov 7, 2018 1:30 PM

European stock markets cheered the US midterm election results that will force President Donald Trump to share power with his Democrat opponents.

The outcome left the two houses of Congress split between the Republicans and Democrats but delivered little in the way of surprises.

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Markets in Asia swung between small gains and losses as investors digested the results early Wednesday, before ending the day mixed. By the time European markets started trading, the focus had shifted to the positives of a divided Congress — the prospect of a period of government inactivity.

"This was the most benign result possible from this midterm election," wrote analysts at Gavekal Research. "Historically, legislative gridlock has been modestly positive for US equity markets. Simply put, changes in regulation generally prove costly."

Tokyo's benchmark Nikkei index ended 0.3% lower, while the Shanghai Composite dropped 0.7%. But London's FTSE 100 index, Germany's DAX and France's CAC 40 all gained about 1%. And US futures indicated a clearly positive start to the day on Wall Street.

The elections are shaping up to have significant political consequences for the world's largest economy. Democrats won a majority in the House of Representatives while Republicans will retain control of the Senate.

But investors are betting that there won't be any major changes in policy.

"I don't think the outcome is a big surprise," Larry Fink, the CEO of money management firm BlackRock, said Wednesday at a Bloomberg business conference in Singapore.

Markets suffered "a big setback" in October and are now "trying to restabilize," Fink said. Digesting the results of the midterms "will be part of that restabilizing process," he added.

Getting used to gridlock

Gridlock in the United States means neither party is likely to be able to enact sweeping legislation. While that may mean Republicans and President Trump fail to cut taxes further, it also means the current tax cuts can't be rolled back. A sweeping Democrat win may also have encouraged the party to push for a higher federal minimum wage.

The main US indexes had closed up just over 0.5% on Tuesday as voters went to the polls.

With Congress divided, America's fiscal, regulatory and monetary policies will likely stay the same. Investors typically don't mind gridlock, cynically figuring it means Washington can't mess anything up.

"Past performance does not guarantee future responses, but sound fundamentals, not politics, are likely to continue to drive economic performance," commented analysts at Berenberg bank.

David Rubenstein, the billionaire co-founder of private equity firm The Carlyle Group, pointed out that the US economy often performs well when control of Congress is split between Republicans and Democrats.

"We shouldn't automatically assume the economy will go south," he said at the Bloomberg conference. "They have to compromise a bit to get anything done and this tends to be positive."

But too much gridlock can also be a bad thing, as demonstrated by the debt ceiling stalemate of 2011 that caused an unprecedented credit rating downgrade.

"Expect fiscal deadlines to become more disruptive," Goldman Sachs analysts wrote in a report this week ahead of the elections.

Trade war likely to rumble on

And the newly empowered Democrats are unlikely to push for any major changes to a White House policy that has unsettled investors around the world, particularly in Asia: Trump's trade war with China.

Ahead of this week's elections, Trump fueled hopes of a potential deal on trade with Chinese President Xi Jinping.

Experts have expressed skepticism that the two sides will bridge their differences anytime soon over US complaints that the Chinese government oversees the theft of US intellectual property and pressures American companies to hand over key technology.

"I don't think there is an instant cure for the trade issue," Trump's former top economic adviser, Gary Cohn, said Wednesday at the Bloomberg conference.

The midterm results spared investors the shocks of the US presidential election and Brexit referendum in 2016. Both surprise events sparked dramatic reactions in markets. Stock futures initially plunged the night of Trump's election, before rebounding and closing with a resounding gain.

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