NEW YORK (Reuters) - Democrats rode a wave of dissatisfaction with President Donald Trump to win control of the U.S. House of Representatives in midterm elections on Tuesday, giving them the opportunity to block Trump's agenda and ramp up scrutiny on his administration.
Two years after his surprise win of the White House,Trump and his fellow Republicans expanded their majority in the U.S. Senate, following a divisive campaign marked by fierce clashes over race, immigration and other cultural issues.
How U.S. markets are expected to open later [.N]
MARKET REACTION: STOCKS - U.S. S&P 500 e-mini futures were up 0.6percent. MSCI's all-country world index was up0.4 percent.
BONDS - The 10-year U.S. Treasuries yield sat near a session low at 3.1985 percent.
DOLLAR - The US dollar index was down 0.5 percent. The euro, the yen, the Swiss franc, sterling and for emerging markets, the South African rand, made the most pronounced gains.
PETER TUZ, PRESIDENT, CHASE INVESTMENT COUNSEL CORP IN CHARLOTTESVILLE, VA
"The election turned out pretty much expected … Now we're in an environment that people can understand again so they'll be willing to put some money back on the table. There was a little fear out there. Markets dislike uncertainty. We had uncertainty out there.”
“Historically the midterm to the next election is a strong one for the market. It goes back to the presidential cycle. You'll see efforts to boost the economy, to help the President's re-election chance.
"I don't think you'll see any effort, unless it’s done quickly by the end of this year, to make the tax cuts permanent or broaden them. That's off the table."
“The chances of interest rates rising significantly have slowed down a bit because you’re not going to see the second round of tax cuts. You won't see a higher than expected deficit. You might see more of a slower rise in interest rates than you would have seen with complete Republican control of Congress again.”
"I'd be worried about healthcare. If anything stuck out to me, it’s healthcare. It was the signature issue of the election. People want more government help with healthcare. If there's an industry the President and Congress could agree on its the need to do something for healthcare.”
"President Trump's drug price plan, the odds of it passing probably just went up some. I'm thinking about the drug stocks we own this morning. Companies that rely on a one or two drugs with very high prices, it might be bad news for them, not today, not tomorrow but over the next couple of years. You're going to see a higher likelihood of drug prices reined in than you would if the Republicans had maintained control of both houses of Congress."
"If there are efforts to broaden Medicare or Medicaid that's a really expensive thing to do.”
MAZEN ISSA, SENIOR FOREIGN EXCHANGE STRATEGIST AT TD SECURITIES IN NEW YORK:
“There was this expectation that if we didn’t get a divided Congress, we might see risk sentiment becoming a little shaky, but since that didn’t happen we have a risk-on move. That said, for the dollar, there are fewer fiscal initiatives like tax reform to drive sentiment higher. Any sort of fiscal stimulus is less likely to be observed over the next two years.
"In foreign exchange, we have seen a very significant shift of capital flows into U.S. assets recently, helped by fiscal policy that supported the dollar. That does not look like the case going forward. There’s less appetite to trade the Buy America theme. It could be a more challenging environment for the dollar in the next few months.
"The dollar has remained fairly well-loved for a long time. Now that the election uncertainty has passed, we might see a reduction in the dollar long positions. But it’s a slow-burn story, it’s not going to change overnight.
"The dollar looks more vulnerable even though growth looks good. There isn’t really a fresh catalyst to suggest that folks should be accumulating dollars at this moment.”
CHRIS ZACCARELLI, CHIEF INVESTMENT OFFICER, INDEPENDENT ADVISOR ALLIANCE, CHARLOTTE, NORTH CAROLINA
“Because there was no major surprise I don’t think there was massive repricing and you are seeing equities higher.
"You’re going to see outperformance of the U.S. versus the world in the short run because of where we are in the economic cycle. The fiscal stimulus that was put in place only exacerbates that.”
“Emerging markets are really tricky right now because a weaker dollar, all things equal, should be a benefit for emerging markets. The problem is so much of emerging markets is in China, and I don’t see any reason why the China trade war should subside. I think Trump, he’s tempted to double down on the China trade war given his losses in the House so I think that’s a very difficult place to be an investor. You might get whipsawed.”
“Things have repriced and tech is a bit less expensive than it was heading into October... as interest rates continue to rise I find that tech typically underperforms in that environment.”
KENNETH J. TAUBES, CIO OF US INVESTMENT MANAGEMENT, AMUNDI
"We do not expect any significant immediate market reaction, however the prospect of key legislation will determine future market evolution."
"Fixed income markets could come under some pressure if the President and Congress approve a new stimulative fiscal program however we expect 10 year yields to remain around the current levels in the coming months."
"For equities, the historical precedent has been for markets to underperform ahead of the midterm elections and then rally until year-end. We expect this trend to be confirmed.
"Moving towards 2019, equity markets will shift their focus more to fundamentals such as earnings sustainability. The outlook is still positive for US equity in 2019, but with a strong focus on selection as the economic and financial cycle mature."
DEEPAK PURI, CIO AND HEAD WD AMERICAS, DEUTSCHE BANK WEALTH MANAGEMENT
"In previous U.S. Administrations where the President was Republican and the Congress was split (Republicans with a Senate majority and Democrats in control of the House of Representatives), the S&P 500 historically has generated a total return of around 10.8 percent (going back to 1933)."
"Encouragingly, the S&P 500 has also not declined in the 12 months after a midterm election going back to 1946... however, the historical precedents did not feature trade conflicts, so the next 12 months might be different."
LARRY HATHEWAY, CHIEF ECONOMIST AT GAM INVESTMENTS
"For investors, gridlock over the next two years is potentially positive, insofar as it removes a considerable amount of legislative, tax and regulatory policy uncertainty. The initial market reaction - mostly higher overseas share prices - is consistent with this view."
"At this juncture it remains premature to draw strong conclusions. Insofar as potential escalation of trade conflict remains a key concern for global growth and the performance of non-US equity markets, investors will likely remain hesitant until further clarifications of policy intent are forthcoming. In that context, the ongoing bilateral discussions between China and the US will become a key focal point."
KOJI FUKAYA, PRESIDENT, FPG SECURITIES, TOKYO
"The key questions for the currency market after today is,will the Trump administration be able to keep pursuing policiesto stimulate the U.S. economy, and will there be a shift towardsChina over trade?"
KYOYA OKAZAWA, HEAD OF INSTITUTIONAL CLIENTS APAC, BNPPARIBAS, HONG KONG
"The Japanese market is resilient as it has priced in theresult which was widely expected, but the impact from theelection results could gradually pressure the market."
"Investors will gradually realize that Democrats are hard onChina as well, so what has been a worry to the financial marketwon't change even after the midterm elections."
DOUG BIBEN, FOUNDER AND PORTFOLIO MANAGER AT BCM, LOSANGELES
"It was a good enough night for the president ... there wasn’t a ‘Blue Wave.’ I think it was a pretty good night for the markets and the U.S. economy. If we were to see fiscal stimulus, it would come in the form of infrastructure. That could be the big stimulus coming if you can put together a coalition. You can't spin a tax cut politically for the rich but infrastructure is about jobs. I think that is the likely scenario."
JUAN PEREZ, SENIOR CURRENCY TRADER, TEMPUS, INC, WASHINGTON
"Things fell as expected, so we have to see if the Housewill affect the trade conflict. This really was what marketspriced-in. We may see some recovery from major counterparts, butthat alludes more to a natural recovery after the greenbackgained by over 2.5 percent throughout October."
ED AL-HUSSAINY, SENIOR RATES AND CURRENCY ANALYST, COLUMBIATHREADNEEDLE INVESTMENTS, MINNEAPOLIS
"A break of 1.13 in euro/dollar and 3.25 in 10-year Treasuryyields are significant short-term technical levels. We arewatching for potential spillover effects to other risk assets.In the short term, a Republican loss in the House, although inline with consensus expectations, should nevertheless amplifyrisk market volatility, detract from positive sentiment, and bepositive for US rates."
"We are confident that these overnight moves will have nextto no bearing on the medium-term direction of asset prices asparticipants digest the final outcome and the 2019 legislativeagenda starts to take shape over the next several months."
MICHAEL PURVES, HEAD OF EQUITY DERIVATIVES STRATEGY, WEEDEN& CO, NEW YORK
"The surprise was that there was no surprise. I thinkeveryone was bracing for any possible, crazy scenario to showitself, but it basically looks like the baseline consensus forecast was correct. If the futures are up now and they stay up it's because there is an uncertainty factor that is now out of the market."
JOHN VAIL, CHIEF GLOBAL STRATEGIST, NIKKO ASSET MANAGEMENT,NEW YORK
"The GOP increased its majority in the Senate by severalseats, which will make confirmations of judges andadministration officials easier and overriding his vetoesharder. It will also make conviction of Trump, if impeached bythe House, less likely."
MASAAKI KANNO, CHIEF ECONOMIST, SONY FINANCIAL HOLDINGS,TOKYO
"To the extent that political uncertainty disappears, themarket is likely to be risk on, which means stock prices in theU.S. will likely rise and dollar/yen will be at least stabilizedor may rise a little bit."
JON HILL, US RATES STRATEGIST, BMO CAPITAL MARKETS, NEW YORK
"The return to political gridlock in Washington will likelyserve to temper growth expectations, or at least moderate theprospect of additional stimulative fiscal policy. However, wedon't anticipate this to dissuade the Fed from continuing todeliberately tighten monetary policy as other areas of theeconomy maintain very strong momentum. This combination presentsan additional impetus for the (Treasury yield) curve to moveflatter from here.”
MOHANNAD AAMA, MANAGING DIRECTOR, BEAM CAPITAL MANAGEMENTLLC, NEW YORK
If one attributes part of the nearly 10 percent drop (in S&P 500) last month to a pricing-in of a worst case outcome then we may be looking at a slight, albeit short-lived, rebound in the days ahead."
"Now that the elections are behind us, earnings and the Fedwill be back in focus. All indications are that neither of thosefactors support expanding multiples for stocks."
RAY ATTRILL, HEAD OF FX STRATEGY, NATIONAL AUSTRALIA BANK,SYDNEY
"The markets were geared for the Democrats winning thehouse. Now, we are seeing the dollar selling off as it lookscertain that Democrats are in fact taking the house. This isalmost exactly in line with expectations and polls."
"Trump has still got trade and policy levers and he is morelikely to go harder on trade now. That's our opinion. He willpotentially extend tariffs to all Chinese imports by February.We'll wait to see how this plays out."
STEVE FRIEDMAN, SENIOR GLOBAL ECONOMIST, BNP PARIBAS ASSETMANAGEMENT, NEW YORK
"In terms of major economic implications, I thinkimportantly, two things don't change. One is the 2016 tax lawchanges. With divided government, Democrats will have no abilityto roll back any of those measures. And second, trade policy.Because the president has significant authority over tradepolicy and can move forward without Congress on tariffs."
"If the domestic agenda is blocked as a result of dividedgovernment, Trump could actually pivot more aggressively towardstrade because that's an area where he's less constrained and hefeels like it resonates with his base ... And whether it's goodeconomic policy or not, I think Democrats are hard pressed tostand up too aggressively to the President on trade policy."
"I see scope for additional spending measures passed byCongress. That's because both parties have signaled support foran infrastructure program. Now, there are significantdifferences in terms of how large it should be, how you pay forit. And the role of the private sector in infrastructurespending. But the will is there, so I think that's one areawhere markets might be under-pricing the risk of stimulus."
JUSTIN WARING, INVESTMENT STRATEGIST, UBS GLOBAL WEALTHMANAGEMENT, NEW YORK "Some parts of the U.S. equity market could begin to face headwinds over concerns about the tone coming from the Democratic House committees. For example, RepresentativeMaxine Waters looks poised to chair the House Financial Servicescommittee. She has long opposed deregulation efforts forfinancials."
"In our view, there is a very low chance of increasedregulation under this Congress, but markets will begin to fretabout 'what dreams may come' if Democrats win a follow-upvictory in 2020. Even so, we continue to recommend an overweightto financials. Despite potential perceived headwinds from Housecommittee hearings, there are bigger factors at play, andpolitical considerations are unlikely to override thefundamentals.”
(Compiled by Marc Jones in London, Americas and Asia markets desks)