US midterms: Impact on Trump's political authority & market implications

As the markets digest the outcome of the US midterm elections, the Democratic takeover of both the House of Representatives and the Senate could significantly weaken President Donald Trump's political authority, analysts said, potentially turning him into a lame-duck president during the final two years of his term. 

 

This, in turn, analysts believe, could trigger a prolonged political confrontation in Washington, with implications for global markets and potentially creating opportunities for Indian stock markets.

 

A Democratic sweep could force Trump to rely more frequently on his veto powers and executive actions to push through his agenda, increasing the risk of political and constitutional confrontations. 

 

"This can even create a constitutional crisis, with adverse consequences for the US market. Perhaps India might gain from this confusion," said V K Vijayakumar, chief investment strategist at Geojit Investments.

 

Over the past 80 years, the party occupying the White House has gained congressional seats in only two midterm elections. Trump experienced a significant reversal in 2018, when Republicans lost 41 seats in the House and Democrats took control, subsequently launching investigations and impeaching him in 2019.

 

Other major setbacks include Bill Clinton's Democrats losing 54 House seats in 1994 and Barack Obama's Democrats losing 63 seats in 2010.

 

Balance of power

 

As Democrats wrest control of both the House and Senate from Republicans, analysts at Emkay Global caution that the usual dynamics of a 'lame-duck presidency' may not apply to Trump, given his willingness to challenge political norms and rely extensively on executive actions.

 

 

“The usual dynamics of a lame-duck presidency may not apply, given Trump's penchant for breaking long-established norms, and his widespread use of executive actions, which may only accelerate in the event of a Democratic sweep,” wrote Madhavi Arora and Harshal Patel of Emkay Global in an October 30 note.

 

Stock market impact

 

For equity markets, the political uncertainty comes at a time when US stocks are trading with considerable momentum, but financial conditions have tightened and energy prices remain elevated. These factors could limit the upside for equities, analysts at Emkay Global said.

 

Historical trends, however, offer some reassurance. The S&P 500 has gained an average of around 6 per cent over the 60 trading days following previous midterm elections, rising to 12 per cent over 120 days and 17 per cent over 180 days, according to Emkay Global. 

 

A period of heightened political uncertainty in the US could potentially improve the relative attractiveness of other emerging markets, including India, the brokerage said. However, the extent of any benefit will depend on how the political confrontation affects the dollar, US Treasury yields, global risk appetite and foreign investor flows.

 

Impact on commodities

 

For commodities, the impact of the election will depend more on the policy implications than on the political outcome itself.

 

A Republican sweep could have meant greater fiscal expansion, continued tariff uncertainty and higher inflation risks, potentially supporting US Treasury yields and the dollar while creating near-term headwinds for gold and silver, according to analysts at Motilal Oswal Financial Services. 

Table source: Motilal Oswal report

 

Democratic control, on the other hand, could constrain further fiscal expansion and eventually soften expectations around economic growth, bond yields and the dollar. At the same time, greater political confrontation in Washington could increase demand for safe-haven assets, potentially supporting precious metals.

 

"For crude oil, the election matters primarily through US foreign policy, Iran and sanctions, while copper and other base metals will remain caught between the US growth outlook and the direction of tariffs," wrote Navneet Damani and Manav Modi of Motilal Oswal Financial Services in an October 30 note. 

 

Geopolitical developments could further complicate the outlook. Any renewed escalation in the West Asia conflict, Damani and Modi said, could rebuild crude oil's geopolitical risk premium, lift inflation expectations and push up Treasury yields.

 

This could create a challenging environment for financial markets, with geopolitical uncertainty supporting demand for gold while higher bond yields simultaneously acting as a headwind for the precious metal.