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Stock relief after US midterms

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A woman passes in front of the US Capitol in Washington, District of Columbia, on November 6 as Americans started voting in mid-term elections. MANDEL NGAN/AFP

Stock relief after US midterms

Stock markets on both sides of the Atlantic charged higher on Wednesday after the US midterm elections produced no major surprises, triggering a relief rally.

“Financial markets are continuing their forward drive on the realisation that investors were rightly positioned for the outcome of the midterm elections,” said Jamel Ahmad at FXTM.

The Democrats regained control of the House of Representatives following Tuesday’s vote, but President Donald Trump’s Republican party widened its majority in the Senate.

The dollar, however, slid against main rivals as investors expected Democratic control of the House to be “a potential roadblock” to any Trump effort to introduce further fiscal stimulus, Ahmad said.

While the election results were broadly in line with forecasts – with some notable upsets and near upsets in the details – the outcome means Trump faces a tough two years before his 2020 re-election bid, with Democrats appearing ready to fight against his tax-cutting, deregulation agenda while boosting oversight of the administration and Trump himself.

Wall Street’s top three stock indices all finished solidly higher. Patrick O’Hare at Briefing.com said the rise in stocks “likely speaks to the relief that the election is done and that the overall result went as expected.”

And the absence of major surprises “has removed an element of uncertainty, which has added to market volatility in recent weeks.”

The broad-based recovery in European stock markets suggests that “investors are hoping that a split Congress will mark the end of Trump’s protectionist agenda, as least as far as Europe is concerned”, said Simona Gambarini at Capital Economics.

Other analysts pointed to the consequences of the power divide.

“The split Congress means that there is more likely to be gridlock, which will significantly curtail [Trump’s] legislative agenda,” said ING chief international economist James Knightley.

Relief rally

While he pointed out that the two sides could possibly work together in areas such as infrastructure spending, he said “for the most part divisions between and within the parties mean that progress will be difficult.”

The result also could mean lower pressure on the Federal Reserve to raise US interest rates more aggressively, taking some heat out of the dollar.

The central bank’s drive to tighten borrowing costs to offset a resurgent US economy has weighed on global stock markets in recent weeks.

Nader Naeimi, head of dynamic markets at AMP Capital Investors in Sydney, saw the elections result as a “good outcome” for the world economy.

“When you look at . . . the expectations of more fiscal spending in the US adding to more pressure on debt and debt issuance, having a split government now with more checks and balances is actually a positive set-up for markets.”

Earlier in Asia, the tone was somewhat less upbeat given the overhang of US-China trade war fears. Hong Kong’s main stocks index finished 0.1 per cent higher after swinging through the day, while Shanghai ended 0.7 per cent down and Tokyo shed 0.3 per cent. Sydney added 0.4 per cent.

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