Donald Trump has suffered one of the most severe defeats of his political career, after Republicans lost control of both chambers of Congress to Democrats in a vote that became a referendum on his presidency.
By 07:40 CET local time, Democrats had won 25 seats in the House of Representatives, bringing them to 220, two more than the 218 needed for a majority.
In the Senate, they took seven seats from Republicans, including Texas, Ohio, Kansas and Maine.
High prices weighed heavily on voters. Around two-thirds said in an Election Day poll that Trump’s tariffs had damaged the economy.
The president said he would accept the results, but added: “I don’t see it as a blow to me.”
He also made clear that he would use his veto to block the Democrats’ agenda, posting a picture of a red cap with the word “VETO” stitched on it. But how much can a Democratic Congress really change for Europe and for markets?
Will a Democratic Congress end the threat of tariffs on Europe? Probably not, because Trump’s tariffs no longer depend on Congress.
After the Supreme Court struck down his emergency tariffs in February, the administration shifted them under Section 301 of the US trade law. This route allows the president to act without the vote of lawmakers.
Democrats can hold hearings and slow down his nominees, but they cannot easily take away this power.
James Smith, an economist for developed markets at the Dutch bank ING, believes a divided Washington could push the president to rely more on it.
“Like foreign policy, trade is another power the president can exercise unilaterally without Congress,” Smith said in a note ahead of the vote.
He did not rule out new tariffs on Europe, which, he said, would matter a great deal for inflation in the US and for the Federal Reserve.
What will happen to US support for Ukraine?
Democrats will chair Senate committees and will decide which of Trump’s nominees are confirmed when the new Congress takes office in January. Many of them also want to approve new funds for Ukraine.
The harder part is spending that money. Over the past two years, the White House has cancelled funds already approved by Congress, holding them until the end of the fiscal year, when they expire.
“In practice, this means that a Democratic Congress can write the law on money for Ukraine or development aid, and the president may not spend it,” said Joan Lee from Nevada, a political associate at the European Council on Foreign Relations, in a comment last month.
Her advice to European governments is to rely only on money that actually arrives.
“Europeans should treat earmarked funds as an aim, not a commitment,” Lee said.
How did markets react?
Investors were mostly calm. The euro rose 0.4% to $1.1232 by 07:00 CET, while the dollar weakened against other major currencies. Gold gained 2% to $4,011 an ounce, back above $4,000, and silver rose 3.4% to $51.49.
U.S. and European stock futures were slightly lower on both sides of the Atlantic. S&P 500 futures fell 0.3%, Nasdaq 100 futures fell 0.4%, while Euro Stoxx 50 and Germany’s DAX futures fell about 0.5% ahead of the open.
U.S. government bonds rose. The yield on the 10-year Treasury note fell 2.9 basis points to 4.94%, the 2-year yield fell to 4.61%, and the 30-year yield to 5.32%. The yield on Germany’s 10-year Bund closed Tuesday at 3.33%, before the results came in.
Bitcoin was little changed at around $77,700, and Brent crude traded near $104 a barrel.
Is a divided Washington good for investors?
Markets have usually liked it. When the White House and Congress disagree, fewer major laws are passed, which means fewer surprises.
History also favors bondholders. In the three months after past midterm elections, 10-year Treasury yields have fallen by an average of about 20 to 25 basis points, according to Luca Bindelli, head of investment strategy at Swiss private bank Lombard Odier.
“We think a Democratic win would be neutral to slightly positive for the fiscal outlook. Congress could curb Trump’s expansionary agenda and, with it, the deficit,” said Diego Barnuevo, market analyst at payments company Ebury, in comments sent by email.
What happens next for the euro?
Currency analysts doubt the elections will change much for a long time. For the dollar, the Federal Reserve still matters more than Congress.
“The greenback continues to react mainly to the Federal Reserve story, which should not face an immediate and direct impact from the medium-term outcome,” said Francesco Pesole, FX strategist at ING, and his colleagues in a note on Tuesday.
The euro has its own problems too. Energy prices remain high mainly due to the war with Iran, ING expects eurozone inflation to stay around 4%, and investors are demanding more to hold French government bonds.
The new Congress takes office in January. Until then, Trump keeps the Republican majority in both chambers, and even after that, his veto pen will still be on the table.