US midterms: What Trump's defeat means for Europe and global markets

Donald Trump has suffered one of the worst defeats of his political career, after Republicans lost control of both chambers of Congress to the Democrats in a vote that turned into a verdict on his presidency. ADVERTISEMENT ADVERTISEMENT By 07:40 CET, Democrats had gained 25 seats in the House of Representatives, taking them to 220, two more than the 218 needed for a majority. In the Senate, they took seven seats from the Republicans, including in Texas, Ohio, Kansas and Maine. High prices weighed heavily on voters. About two-thirds said in an election-day survey that Trump's tariffs had hurt the economy. The president said he would accept the results, but added: "I don't view it as a hit on me." He also made clear he would use his veto to block the Democrats' agenda, posting a picture of a red cap with the word "VETO" stitched on it. But how much can a Democratic Congress really change for Europe and for markets? Will a Democratic Congress end the tariff threat to Europe? Probably not, because Trump's tariffs no longer depend on Congress. After the Supreme Court struck down his emergency tariffs in February, the administration moved them under Section 301 of US trade law. That route lets the president act without a vote by lawmakers. Democrats can hold hearings and slow down his nominees, but they cannot easily take that power away. James Smith, developed markets economist at Dutch bank ING, believes a divided Washington could even push the president to rely on it more. "Like foreign policy, trade is another power the president can wield unilaterally without Congress," Smith said in a note before the vote. He did not rule out new tariffs aimed at Europe, which he said would matter a lot for US inflation and for the Federal Reserve. What happens to US support for Ukraine? Democrats will chair the Senate committees and decide which of Trump's nominees get confirmed when the new Congress takes office in January. Many of them also want to approve new money for Ukraine. The harder part is getting that money spent. Over the past two years, the White House has cancelled funds already approved by Congress by holding them back until the end of the fiscal year, when they expire. "In practice, this means that a Democratic Congress could write money for Ukraine or development aid into law and the president might not spend it," Nevada Joan Lee, policy fellow at the European Council on Foreign Relations, said in a commentary last month. Her advice to European governments is to count only on money that actually arrives. "Europeans should treat earmarked funds as intent, not commitment," Lee said. How did markets react? Investors were mostly calm. The euro rose 0.4% to $1.1232 by 07:00 CET, as the dollar weakened against other major currencies. Gold gained 2% to $4,011 an ounce, back above $4,000, and silver rose 3.4% to $51.49. Stock futures were slightly lower on both sides of the Atlantic. S&P 500 futures fell 0.3%, and Nasdaq 100 futures fell 0.4%, while futures on the Euro Stoxx 50 and Germany's DAX were down about 0.5% ahead of the open. US government bonds rallied. The 10-year Treasury yield fell 2.9 basis points to 4.94%, the 2-year yield slipped to 4.61% and the 30-year yield to 5.32%. Germany's 10-year Bund yield had closed on Tuesday at 3.33%, before the results came in. Bitcoin was little changed at around $77,700, and Brent crude traded near $104 a barrel. Is a divided Washington good for investors? Markets have usually liked it. When the White House and Congress disagree, fewer big laws get passed, and that means fewer surprises. History also favours bondholders. In the three months after past midterm elections, 10-year Treasury yields have fallen by about 20 to 25 basis points on average, according to Luca Bindelli, head of investment strategy at Swiss private bank Lombard Odier. "We think that a Democratic sweep would be neutral to mildly positive for the fiscal outlook. Congress could restrain Trump's expansionary agenda and, with it, the deficit," Diego Barnuevo, market analyst at payments company Ebury, said in emailed comments. Ed Yardeni, president of Yardeni Research, is more cautious. "Wall Street traditionally welcomes political gridlock because it reduces the likelihood that Congress will pass extremist legislation. But this time could be different," Yardeni said in a note on Monday. His concern is the debt ceiling, the legal cap on how much the US government can borrow. A divided Washington will still have to agree to raise it, and a long fight over it could push borrowing costs up rather than down. Barnuevo expects the limit to become binding at some point in 2027. What next for the euro? Currency analysts doubt the election will change much for long. For the dollar, the Federal Reserve still matters more than Congress. "The greenback continues to respond predominantly to the Fed story, which shouldn't face an immediate and direct impact from the midterm result," Francesco Pesole, FX strategist at ING, and his colleagues said in a note on Tuesday. The euro also has problems of its own. Energy prices are still high largely due to the war with Iran, ING expects eurozone inflation to stay around 4%, and investors are demanding more to hold French government bonds. The new Congress takes office in January. Until then, Trump retains Republican majorities in both chambers, and even after that, his veto pen will still be on the desk.