Asian shares hold onto earlier gains as US midterms play out as expected

Tokyo — Wall Street stock futures and Asian shares held earlier gains on Wednesday after Democrats won control of the US House of Representatives, boosting the party’s ability to block President Donald Trump’s political and economic agenda.

The Democrats’ House win creates a clear hurdle for Republicans to easily pass legislation through both chambers of Congress, clouding the outlook for some of Trump’s key economic proposals.

In Asian trade, major broadcasters projected the Democrats would wrest House control, while the Republicans were seen retaining the Senate.

While both outcomes were broadly in line with market expectations, a reason markets did not sell off, the prospect of political gridlock creates some uncertainty for investors. The dollar weakened against most of its major counterparts.

In equities markets, US S&P500 futures rose 0.3%, MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.3% and Japan’s Nikkei gained 1.2%.

“It has clearly become difficult for Republicans to pass additional tax hikes or amendments to Dodd-Frank regulations [on financial institutions] for instance,” said Tomoaki Shishido, fixed income analyst at Nomura Securities.

Investor sentiment had been volatile in Asian trade with stocks and the dollar swinging on the Republicans’ fluctuating prospects of retaining the House.

While a split Congress would put a brake on Trump’s agenda, such as tax cuts or deregulation, some investors think the Democrats may agree to more spending.

“There are still areas with compromise for spending, so even with a split government I expect more fiscal stimulus ahead. There is some possibility for compromise on infrastructure spending as well,” said Steve Friedman, New York-based senior economist at BNP Paribas Asset Management.

“If there is additional fiscal stimulus, it suggests that fiscal policy is more of a tailwind for US growth and it should, all things equal, be supportive for stocks.”

On the other hand, many investors also expect Trump to continue to take a hard line on tariffs, which he can impose without Congressional approval. That keeps alive worries about a trade war between China and the US.

Trump’s massive tax cut, enacted in December, and a spending agreement reached in February have helped lift the US economy, but they have also widened US federal budget deficit.

As a result, treasury supply has been growing, pushing US bond yields higher.

The election results pushed down the 10-year US treasuries yield about two basis points to 3.193%, off its seven-year high of 3.261% touched a month ago. But the debt market also remains under pressure from this week’s record volumes of longer-dated government debt supply.

Oil prices were soft after a 2% fall the previous day, with US crude futures hitting an eight-month low as Washington granted sanction waivers to top buyers of Iranian oil and as Iran said it has so far been able to sell as much oil as it needs to.

US West Texas Intermediate (WTI) crude futures traded 0.5% lower at $61.91 a barrel having hit a low of $61.31 on Tuesday, the weakest price since March 16.

In the currency market, the dollar dipped on the US election results. Against the yen, it was 0.2% lower at ¥113.23, reversing earlier gains to one-month high of ¥113.82.

The euro rose 0.3% to $1.1467 and the British pound gained 0.3% to $1.3140, hitting a three-week high.

Sterling extended gains made the previous day on hopes of a Brexit deal breakthrough after Brexit secretary Dominic Raab said “thumbs up” on his way out of a cabinet meeting.

That helped sterling recover losses following remarks from a senior member of the Northern Irish Democratic Unionist Party earlier that it looked like Britain would exit the EU without a deal.

Reuters