US midterm elections: European stocks rally after US vote, eyeing political gridlock

Frankfurt's DAX 30 index jumped 1.0 per cent and the Paris CAC 40 won 1.5 per cent.
Frankfurt's DAX 30 index jumped 1.0 per cent and the Paris CAC 40 won 1.5 per cent.PHOTO: REUTERS

LONDON (AFP) - European stock markets rallied on Wednesday (Nov 7) after a mixed session in Asia, as analysts warned of potential economic fallout from political gridlock in the United States triggered by the country's midterm election results.

The dollar slid against main rivals, with the pound boosted also by talk of an imminent Brexit deal, while oil prices jumped on reports Opec could cut crude output next year.

In the US, President Donald Trump's Republican party maintained its control of the Senate following Tuesday's vote but the Democrats regained power in the House of Representatives.

While broadly in line with forecasts, the outcome means that Mr Trump faces a tough two years before his 2020 re-election bid, with Democrats ready to fight against his tax-cutting, deregulation agenda and boost oversight of the White House.

Approaching the session's half-way mark, London's benchmark FTSE 100 index stood 1.3 per cent higher compared with the close on Tuesday.

In the euro zone, Frankfurt's DAX 30 index jumped 1 per cent and the Paris CAC 40 won 1.5 per cent.

"The split Congress means that there is more likely to be gridlock, which will significantly curtail (Trump's) legislative agenda," said Mr James Knightley, chief international economist at ING.

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".

 

"For example, President Trump's proposal on additional income tax cuts has received a major blow because of the election result."

But such a scenario could mean less 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.

Mr 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, 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.

Mr Neil Wilson, chief market analyst at Markets.com, added that Mr Trump's long-running trade war with China would be unlikely to be affected by the vote outcome, meaning tit-for-tat tariffs will continue, eventually squeezing US consumers.

"A split Congress will, in all likelihood, not stop Trump from doubling down on tariffs with China. This could result in us getting all the anti-growth measures of Trump without more of the pro-growth reforms," he argued.

Elsewhere on Wednesday, oil prices climbed as Bloomberg reported that Opec ministers meeting in Abu Dhabi this weekend will discuss the possibility of cutting crude production again next year - a move that would end six months of supply increases.