US Politics: How will the midterm results affect the markets?

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The midterm elections have seen the Republicans lose control of the House but retain its dominance in the Senate.

President Donald Trump has lost control of the House of Representatives but how will the financial markets react? The Tradefair team brings you the latest from US politics...

"The most significant consequences of the US midterm elections concern the domestic political landscape."

- Silvia Dall’Angelo, Senior Economist at Hermes Investment Management.

For once, the polls seem to have got it right. The Democrats took control of the House of Representatives in the midterm elections, while the Republicans maintained their dominance over the Senate. This means Congress is now divided, but is this a good or bad thing for Washington?

The midterms are often seen as an unimportant vote, with no influence over who takes up the main seat in the Oval Office, however this year is different. With President Trump having championed divisive policies, the election halfway through his term has been seen as a pivotal way to control his power.

As the results came on Tuesday night, it became clear that Republicans had lost their control of the House, with the Democrats now holding 223 seats compared to the 197 retained by Trump's party. The customary third of the Senate was up for reelection, meaning many experts were convinced it would stay in control of the Republicans.

This belief came into fruition, as the Republicans kept 51 seats in total, giving them a narrow win over the Democrats' 45.

The midterms and the markets

Although the midterm elections are often seen as a minor vote, they do have an impact on the financial markets. The split in Congress could make investors nervous, with many enjoying the 28% stock market rally since Trump took office. However, as the election drew closer, the markets have faltered.

But now the vote is over and the results are in, will traders pick themselves up and dust themselves down? History suggests so.

Since Harry S Truman's presidency in the 40s, stocks have always been higher 12 months after the midterms regardless of how Congress has been divided. Trump is also about to enter his third year in his presidency, which is historically the most positive for stocks.

It's not unusual for the lead up to the midterms to be a rough time for the markets either. As the political landscape prepares for some kind of shift, traders batten down the hatches and prepare for the worst.

However, once the results are revealed, investors look to future and how to make the best out of any situation. And with Brexit, the China-US trade war, and Trump's politics, the markets have proven themselves to be resilient no matter what the turmoil has been.

How has Trump reacted?

Not one to be humble, many were curious about how President Trump would react to his party's loss. Choosing to take an optimistic approach, he tweeted after a rare Twitter silence during the midterms.

Also choosing to see the proverbial glass as half full was Press Secretary Sarah Huckabee Sanders. Speaking to Fox News before the polls closed, she claimed that the US was "seeing Americans come out and unanimously say that they are proud" of their President.

She called the night "incredible" for Trump, despite having already lost the House at the time of her interview. Sanders also said Democrats shouldn't "waste time investigating" the President now they have control of the House.

How will the results impact President Trump?

Experts have speculated that the midterm results will lead to gridlock on Capitol Hill, with neither party able to make changes without some support from the opposition. This means that, though there may be no sweeping legislation changes to healthcare or taxes, there will be little chance of getting anything repealed either.

This may cause frustration for politicians but should offer the stability investors need to recover from the poor market performance in the run-up to the midterms. Indeed, trade opened positively the morning after the results were made official.

However, with the Congress stalemate, it's unlikely that Trump will divert from his "America First" mantra. This means his showdown with China will probably continue. Regardless of whether Democrats agree, the President has executive power over trade matters, meaning this element of policy will still largely be dictated by Trump.

Silvia Dall'Angelo, Senior Economist at Hermes Investment Management, said: "The most significant consequences of the US midterm 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."

However, she added that with control of the House, Democrats could use subpoena powers to widen investigations "into issues such as Russian interferences in the 2016 elections". Dall'Angelo said this would make it a "challenging environment" for Trump and may lower his chance of winning a second term.

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