What Trump’s defeat means for Europe and global markets

Donald Trump has suffered one of the biggest political defeats of his career after Democrats won control of both chambers of the US Congress in midterm elections dominated by concerns over the cost of living and the economic impact of his policies.

Democrats had secured 228 seats in the House of Representatives, ten above the 218 needed for a majority, compared with 139 for Republicans, with dozens of races still to be called.

In the Senate, Democrats gained seven seats from Republicans, including in Texas, Ohio, Kansas and Maine.

High prices were a decisive factor in the vote, with about two-thirds of voters saying in an election-day survey that Trump’s tariffs had harmed the economy.

The president said he would accept the results but insisted he did not regard them as a personal setback. He also signalled his intention to use his veto to block the Democratic agenda, posting an image of a red cap bearing the word “VETO”, while telling the New York Times he was prepared to work with Democrats.

The new political balance raises questions about the implications for Europe, particularly over trade, support for Ukraine and financial markets. However, Trump’s powers over foreign policy and trade remain substantial, limiting the extent to which Democrats can reverse his policies.

Tariffs remain a threat to Europe

A Democratic-controlled Congress is unlikely to bring an immediate end to Trump’s tariff policy, as the administration has shifted towards legal mechanisms that allow the president to impose trade restrictions without congressional approval.

Following the Supreme Court’s decision to strike down his emergency tariffs in February, the administration moved to use Section 301 of US trade law, which provides the president with powers to act unilaterally.

Democrats will be able to hold hearings, scrutinise the administration and delay confirmation of nominees, but removing the president’s trade powers would be difficult.

James Smith, developed markets economist at ING, said a divided Washington could encourage Trump to rely even more heavily on powers that do not require congressional approval.

“Like foreign policy, trade is another power the president can wield unilaterally without Congress,” he said in a note before the election.

Smith warned that further tariffs targeting Europe remained possible, with potentially significant consequences for US inflation and the Federal Reserve’s monetary policy.

Ukraine funding remains uncertain

Democrats will take control of Senate committees and gain influence over the confirmation of Trump’s nominees when the new Congress begins work in January. Many Democratic lawmakers also support approving additional funding for Ukraine.

However, congressional approval does not guarantee that money will reach Kyiv.

Over the past two years, the White House has prevented some funds already approved by Congress from being spent by withholding them until the end of the fiscal year, when they expire.

Joan Lee, policy fellow at the European Council on Foreign Relations, previously warned that a Democratic Congress could approve funding for Ukraine or development assistance only for the president to prevent its implementation.

She advised European governments to distinguish between funds approved by lawmakers and money actually delivered.

“Europeans should treat earmarked funds as intent, not commitment,” Lee said.

The election therefore offers Ukraine the prospect of stronger congressional support, but does not remove the uncertainty surrounding the administration’s willingness to release assistance.

European markets recover as investors assess the outcome

European stocks recovered after an initially nervous reaction to the results.

By 10.00 CET, the Euro Stoxx 50 had gained 0.8%, Germany’s DAX was up 0.6% and Spain’s IBEX 35 had risen 1.6%. US stock futures also moved higher, with S&P 500 contracts gaining 0.2%.

Banks led the rally as investors favoured lenders with strong domestic operations. Deutsche Bank rose 3.6%, Intesa Sanpaolo gained 3.3%, Commerzbank and Société Générale advanced 3.1% each, while Santander and UniCredit were up 3%.

Clean energy stocks also rebounded after suffering under Trump’s policies. Danish wind farm developer Ørsted gained 7.3%, while turbine manufacturer Vestas rose 5.2%.

Defence shares fell amid concerns that a Democratic Congress could constrain the expansion of US military spending promoted by Trump. European defence companies also have significant exposure to the US military market.

BAE Systems dropped 5.2%, Hensoldt fell 4.9%, Thales lost 4.5%, Saab declined 3.8%, Rheinmetall slipped 3.2%, Dassault Aviation fell 2.8% and Leonardo was down 2.7%.

Gold and silver were among the strongest performers. Gold rose 2.7% to $4,035 an ounce, moving back above $4,000, while silver gained 4% to $51.76.

The euro strengthened 0.5% to $1.1247 as the dollar weakened against major currencies.

US government bonds also rallied, with the 10-year Treasury yield falling 3.7 basis points to 4.93%. The two-year yield declined to 4.61% and the 30-year yield to 5.30%. Germany’s 10-year Bund yield remained broadly unchanged at 3.33%.

Bitcoin rose 1.3% to about $78,300, while Brent crude traded near $104 a barrel.

Political gridlock could support markets, but risks remain

Investors have historically welcomed divided government because it makes major legislative changes less likely, reducing the risk of unexpected policy shifts.

Bond markets have also tended to benefit following midterm elections. Luca Bindelli, head of investment strategy at Lombard Odier, said 10-year Treasury yields had historically fallen by an average of 20 to 25 basis points in the three months after such elections.

Diego Barnuevo, market analyst at Ebury, said Democratic control could be neutral or mildly positive for the US fiscal outlook by limiting Trump’s expansionary agenda and restraining the deficit.

However, not all analysts expect political gridlock to be beneficial.

Ed Yardeni, president of Yardeni Research, warned that the situation could be different this time, particularly because Congress will still need to agree on raising the federal debt ceiling.

A prolonged confrontation over the borrowing limit could increase uncertainty and push borrowing costs higher. Barnuevo expects the ceiling to become binding at some point in 2027.

Euro outlook still depends on economic fundamentals

The election is not expected to significantly alter the euro’s longer-term outlook, with currency analysts continuing to focus on the Federal Reserve’s monetary policy rather than congressional control.

ING foreign exchange strategist Francesco Pesole said the dollar remained primarily influenced by expectations for the Fed, which were unlikely to face an immediate or direct impact from the election result.

The euro also faces its own economic challenges. Energy prices remain elevated, partly because of the war with Iran, while ING expects eurozone inflation to remain around 4%. Investors are also demanding higher returns to hold French government bonds.

The new Congress takes office in January. Until then, Trump retains Republican majorities in both chambers, while his veto power will remain in place even after Democrats assume control.

The election therefore represents a significant political setback for the president, but its immediate consequences for Europe are likely to be limited. Tariff risks remain, Ukraine funding is still uncertain and markets will continue to respond primarily to economic fundamentals and the Federal Reserve.

via Euronews