Donald Trump has suffered one of the worst defeats of his political career, after Republicans lost control of both houses of Congress to Democrats in a vote that became a verdict on his presidency. As of 10:05 CET, the Democrats had won 228 seats in the House of Representatives, ten more than the 218 needed to obtain the majority, compared to 139 for the Republicans, and there are still dozens of elections to be called. In the Senate, they took seven seats from Republicans, including Texas, Ohio, Kansas and Maine. High prices weighed heavily on voters. About two-thirds said in an Election Day poll that Trump’s tariffs had hurt the economy. The president said he would accept the results, but added: “I don’t see it as a blow against me.” He also made it clear that he would use his veto to block the Democrats’ agenda, posting a photo of a red cap with the word “VETO” sewn onto it. But he also told the New York Times that he was willing to work with Democrats. So how much can a Democratic Congress really change for Europe and the markets? Will a Democratic Congress end the tariff threat to Europe? Probably not, because Trump’s tariffs are no longer up to Congress. After the Supreme Court struck down its emergency tariffs in February, the administration brought them under Section 301 of the US trade law. That route allows the president to act without the vote of legislators. Democrats can hold hearings and stop his nominees, but they can’t easily take that power away. James Smith, developed markets economist at Dutch bank ING, believes a divided Washington could even push the president to trust him more. “Like foreign policy, trade is another power that the president can exercise unilaterally without Congress,” Smith said in a memo before the vote. He did not rule out new tariffs aimed at Europe, which he said would be very important for US inflation and for the Federal Reserve. What about US support for Ukraine? Democrats will chair Senate committees and decide which of Trump’s nominees will be confirmed when the new Congress takes office in January. Many of them also want to approve new funds for Ukraine. The hardest part is spending that money. Over the past two years, the White House has canceled funds already approved by Congress by withholding them until the end of the fiscal year, when they expire. “In practice, this means that a Democratic Congress could sign money for Ukraine or development aid into law and the president might not spend it,” Nevada Joan Lee, a fellow at the European Council on Foreign Relations, said in a commentary last month. His advice to European governments is to only count on the money that actually arrives. “Europeans should treat the allocated funds as an intention, not a commitment,” Lee said. How did the markets react? After a nervous start, European stocks rose. At 10:00 CET, the Euro Stoxx 50 was up 0.8% and the German DAX was up 0.6%, while the Spanish IBEX 35 was up 1.6%. US stock futures also recovered, with contracts on the S&P 500 rising 0.2%. Banks led gains as investors turned again to lenders focused on their home markets. Deutsche Bank rose 3.6%, Intesa Sanpaolo 3.3%, Commerzbank and Société Générale 3.1% each, while Santander and UniCredit gained 3%. Clean energy companies, which suffered from Trump’s policies, also recovered. Danish wind farm developer Ørsted rose 7.3% and turbine maker Vestas gained 5.2%. The defense actions went in the opposite direction. Investors fear that a Democratic Congress could curb the increase in U.S. military spending that Trump has pushed, and many European arms makers also sell to the U.S. military. BAE Systems fell 5.2%, Hensoldt 4.9%, Thales 4.5%, Saab 3.8%, Rheinmetall 3.2%, Dassault Aviation 2.8% and Leonardo 2.7%. Precious metals were among the biggest winners. Gold rose 2.7% to $4,035 an ounce, back above $4,000, and silver rose 4% to $51.76. The euro gained 0.5% to $1.1247, as the dollar weakened against other major currencies. US government bonds rose. The 10-year Treasury yield fell 3.7 basis points to 4.93%, the 2-year yield to 4.61%, and the 30-year yield to 5.30%. The 10-year German Bund yield was little changed at 3.33%. Bitcoin rose 1.3% to around $78,300, and Brent crude traded near $104 a barrel. Is a divided Washington good for investors? The markets have usually liked it. When the White House and Congress disagree, fewer major laws are passed, and that means fewer surprises. History also favors bondholders. In the three months since the last midterm elections, 10-year Treasury yields have fallen by 20 to 25 basis points on average, according to Luca Bindelli, head of investment strategy at Swiss private bank Lombard Odier. “We believe a Democratic sweep would be neutral to slightly positive for the fiscal outlook. Congress could restrain Trump’s expansionist 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 it could be different,” Yardeni said in a note on Monday. Their concern is the debt ceiling, the legal limit on how much the U.S. government can borrow. A divided Washington will still have to agree to raising it, and a long fight over it could drive up borrowing costs instead of lowering them. Barnuevo expects the limit to become binding sometime in 2027. What’s next for the euro? Currency analysts doubt the election will change much for long. For the dollar, the Federal Reserve remains more important than Congress. “The dollar continues to respond predominantly to the story of the Federal Reserve, which should not face an immediate and direct impact from the mid-term result,” Francesco Pesole, currency strategist at ING, and his colleagues said in a note on Tuesday. The euro also has its own problems. Energy prices remain high due largely to the war with Iran, ING expects eurozone inflation to remain 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 remain on the table.
