How will the US midterms affect Australian markets?

Donald Trump’s fight to retain control of Congress in the 3 November US midterms will carry direct consequences for Australian markets, whatever the outcome.

Democrats must flip four seats in both the House of Representatives and Senate to overturn narrow Republican majorities. Polls favour the Democrats to reclaim the house, but the Senate contest is too close to call.

Here’s how the vote could steer demand for renewables, deflate AI stocks and spark volatility, triggering ripples across Australian markets.

Republican hold

As Americans grapple with high living costs made worse by rising fuel prices, the chances of Republicans retaining both chambers of Congress have waned, polling suggests.

If Trump’s Republicans were to prevail, market watchers expect an immediate bump on Wall Street that would lift markets around the world, including in Australia.

Rob Talevski, chief executive of Webull Securities Australia, says maintaining control of Congress would pave the way for Trump to deliver signature fiscal stimulus, including a proposed $US5,000 payment to every adult American.

“It’s going to be somewhat like a Santa rally, ‘Here’s your Christmas present’. We’re going to see markets rally on that,” says Talevski.

But Talevski says any post-election sugar hit could quickly collide with the economic headwinds hitting the US and other advanced economies.

“It would be short-term, and then the air would come out of the balloon,” he says.

“It’s going to come back to our key problems we still all have, and some of those are high debt servicing levels, inflationary pressures and employment pressures.”

A Republican victory would also reinforce Trump’s aggressively pro-market stance, clearing the way for fresh momentum in the technology sector that has started to wobble in recent weeks over fears of an AI bubble.

Threats of government shutdowns, budget standoffs, and debt-ceiling negotiations would subside.

Split Congress

A split Congress, whereby Democrats control the house and Republicans the Senate, would probably curb the Trump administration’s spending measures, a result that markets often welcome because reduced borrowing helps cool inflation.

However, the political gridlock would probably spark a bruising debt-ceiling fight next year over the legal limit on total federal borrowing, which could rattle global equities.

Such a fight has the potential to spark a US default, a scenario where Washington declares it can no longer pay its debts, threatening basic services as well as the country’s standing in the global economy.

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There are, however, political risks to both parties in such a gridlock given voters can blame the opposition for a stalemate, which historically means a compromise can be found.

Anthony Malouf, economist at Ebury, says a Democratic takeover of the house would rein in fiscal expansion and ease deficit anxieties that have weighed on markets in recent months.

“The only sort of concern about that will be around the raising of the debt ceiling,” says Malouf.

“That’s probably the biggest concern for us.”

In a split Congress, major legislative breakthroughs for Democrats would be unlikely because they could be blocked by Senate Republicans.

It’s unclear if a change in Congress would affect the conflict with Iran, and with it oil prices, given Trump did not seek its approval before strikes began.

Democratic sweep

A sweep of both chambers would give Democrats more leverage over spending and debt-ceiling negotiations, although the risk of a protracted fiscal showdown would be high.

The sweep scenario wouldn’t neutralise all of Trump’s policies, given he retains veto power and the ability to govern via executive order to retain key economic positions such as tariffs and foreign policy.

The Democrats have promised to use a House majority to contest legislation, investigate the administration, and challenge federal spending priorities.

Taking the Senate would also add influence to judicial picks, ambassadors, and other senior appointments.

In such a scenario, analysts expect targeted pushes by the opposition to boost renewable energy supplies, increase battery production and restore EV incentives, all of which have waned under the Trump administration.

Australia is broadly tapped into the renewables supply chain through its minerals sector, which includes its embattled lithium producers currently suffering from depressed prices.

“We have some companies that are working on the alternative energy side of things and potentially we might see a rebound in lithium when people sort of move back more into focus on batteries,” says Talevski.

According to Benchmark Mineral Intelligence, the US is an outlier among developed economies in seeing falling EV sales, however there are early signs interest in electric vehicles has started to turn around due to high petrol prices.

Analysts at RBC Capital Markets say that a sweep could drag down the tech sector given there are clear signs of “AI angst” in the voting public that policymakers may respond to.

While this would weigh on US equities, Australia’s tech sector is modest in comparison and does not greatly influence the direction of the ASX.

Malouf says while a Republican hold could ignite a near-term boom in markets, a Democratic sweep might be beneficial over the longer term.

“A Democratic sweep actually might be a bit more favourable just due to the prudent nature that they would likely bring in during such a hostile and uncertain time.”

Contested result

A contested – or disputed – midterm result marked by battles over ballot counts could be the most unsettling outcome for markets, given it creates policy uncertainty.

Protracted uncertainty tends to weigh on commodities, one of the biggest sectors on the ASX, because industries that use those resources often pause development plans when policies are unclear.

There are, however, different types of contested results, and most previous examples happened during presidential elections, not midterms.

For example, while Trump didn’t concede the 2020 election result for months, financial markets quickly looked past the legal challenges once the vote counts pointed to a clear winner.

This differs from 2000, when it took five weeks to know the outcome of the presidential race.

While a period of volatility ensued, it was the unravelling dot-com bubble that drove markets lower in 2000, a dynamic that will resonate with investors concerned by the valuations of today’s AI heavyweights.