Markets up, Dollar down as Democrats take control of the House of Representatives
By Liam Sheasby, News Editor
07 Nov 2018
The results of yesterday’s mid-term elections have been coming through steadily today, with the Democrats gaining enough seats for a majority in the lower house of Congress. Before the voting began, many journalists and pundits were predicting a ‘Blue Wave’ of anti-Trump voting and while it wasn’t quite realised, the Democrats still gained from the Republicans quite comfortably overnight.
The US Dollar had been doing well on Tuesday ahead of the results, but today the value dropped against other major world currencies with the USD dropping around 0.5% value.
USD weaker vs all of G10 this morning pic.twitter.com/nWveYax6EX— Jonathan Ferro (@FerroTV) November 7, 2018
The reason, say Bloomberg, is that the House being Democrat and the Senate being Republican will result in a gridlock within the US Congress, resulting in regular stalemates. This makes it harder for the Trump administration to implement any further fiscal initiatives, which in turn might have generated greater Treasury Bond yields and Dollar gains. As this tweet from Reuters’ Markets Editor Mike Dolan shows, the Dollar lost out but the markets showed signs of improvement.
Dollar extends losses on US #Midterm2018 results - generally $, T-bond yields weaker; S&P futures and global stock prices higher, with emerging market currencies and equities doing particularly well pic.twitter.com/byB3oQfDZ1— Mike Dolan (@reutersMikeD) November 7, 2018
Indeed, the market response to the results was one of improved sentiment, with tech firms continuing their bumper run of market popularity.
Wall Street setting up for a post-midterms relief rally with big sector moves in tech, communication services, health care, and financials. pic.twitter.com/6kMbA5UsLs— CNBC's Fast Money (@CNBCFastMoney) November 7, 2018
The opening gains, which can be seen below, reflect investor reassurance that – despite the Republicans losing control of the House – the gridlock between the two tiers of Congress should prevent any of President Trump’s corporate tax cuts from being reversed, which has already boosted company profits. This reassurance has given confidence to investors to play the markets more.
Time is potentially limited for investors however. The Federal Reserve is meeting today and tomorrow to gauge the state of the US economy and decide on future policy, especially their attitude towards continued interest rate rises.
Michael Matousek, a head trader at US Global Investor, told CNBC News that portfolios are being prepared for the outcome of the two-day Fed session.
"Going into the next couple of days gold trading should be pretty light, so we'll move around a bit. Nobody wants to hold big positions or make big changes before the Fed meeting.”
Gold fell on Tuesday as the Dollar and equities both firmed, losing 0.39% from spot. Today has seen a little resurgence, bringing that lost back to just 0.17%, but gold’s demand and subsequently its price are both slightly subdued as investors wait and see what the Federal Reserve has to say before renewing interest in a safe haven like gold bullion.
Standard Chartered analysts issued a company-wide note today stating that the election result hitting the US Dollar would, naturally, result in higher gold prices, predicting gains from the current price of $1,229.55 per ounce up towards the $1,300 per ounce mark.
The House and the Senate:
In the highest mid-term turnout since 1970, the Democrats swung the House of Representatives (the lower house of Congress) from red to blue, gaining 27 seats to claim overall control.
The result featured many milestones for US politics. Alexandria Ocasio-Cortez (New York) and Abby Finkenauer (Iowa), both 29, became the youngest congresswomen in history, while Ilhan Omar (Minnesota) and Rashida Tlaib (Michigan) became the first Muslim women to be elected to the House. The first two Native American women were elected to the House too in Sharice Davids (Kansas) and Deb Haaland (New Mexico), while Democrat Jared Polis (Colorado) became the first openly gay US governor.
The challenge for President Trump will now be protecting his tax records. Traditionally, the President reveals his personal filings, but Trump has so far refused, leading to suspicions in the media. The House, via the Ways and Means Committee, can request the documents, with some Democrats suggesting that any refusal to comply will simply be overruled by the committee using legislation from the early 1900s. President Trump inevitably took to Twitter to defend himself, saying:
If the Democrats think they are going to waste Taxpayer Money investigating us at the House level, then we will likewise be forced to consider investigating them for all of the leaks of Classified Information, and much else, at the Senate level. Two can play that game!— Donald J. Trump (@realDonaldTrump) November 7, 2018
The night wasn’t a total disaster for the Republicans. Many of the seats in the Senate were not up for grabs, and of those that were most were already Democrat. The result is that while the Democrats gained seven governorships, the Republicans increased their majority from 51 to 54 in the Senate. The Senate, being the upper tier of Congress, permits things like executive and judicial appointments, meaning the President will still have control over said positions.
There were sour notes from the mid-term voting with allegations of voter suppression in hotly contested Republican-held areas, with problems such as voting machines not working and people being turned away. Elsewhere there were also allegations of racism against Democrat candidates Stacey Abrams (Georgia) and Andrew Gillum (Florida), with people reporting automated ‘robo-calls’ featuring monkey noises and ‘jungle sounds’.
The next test for President Trump and the Republicans will come in the form of any Federal Reserve decision at the end of this week, but the first big test will be in early December when the government’s funding bill is set to expire. Typically, a government would just extend the deal, but with the House under Democrat control it could be harder to push through proposals such as raising the debt ceiling.
Any delay could spark investor panic, given that a failure to extend the deal would technically be a debt default, and a slump for the markets and the US Dollar would be likely in that scenario.