As markets await the results of the US midterm elections, analysts note that a Democratic Party victory in the House of Representatives and Senate could significantly weaken President Donald Trump's political power, potentially turning him into a puppet president for the last two years of his term.
According to analysts, this could provoke a prolonged political confrontation in Washington, leading to consequences for global markets and potentially creating opportunities for Indian stock markets.
A Democratic triumph might force Trump to rely more frequently on his veto power and executive actions to advance his agenda, thereby increasing the risk of political and constitutional clashes.
V K Vijayakumar, Chief Investment Strategist at Geojit Investments, stated: 'This could even trigger a constitutional crisis with adverse consequences for the US market. India might benefit from this turmoil.'
Historically, in the last 80 years, the party holding the White House has only gained seats in Congress in two midterm elections. Trump experienced a significant reversal in 2018 when Republicans lost 41 seats in the House, and Democrats took control, after which investigations and impeachment began in 2019.
Other major setbacks include the loss of 54 House seats by Democrat Bill Clinton in 1994 and the loss of 63 seats by Democrat Barack Obama in 2010.
Balance of Power
According to Emkay Global, the US midterm elections could lead to Democrats taking control of the House of Representatives and Senate from Republicans, ending the Republican triumvirate and potentially turning President Donald Trump into a puppet leader for the remainder of his term.
However, the brokerage firm warns that the typical puppet presidency dynamic may not work for Trump, given his tendency to challenge political norms and extensive use of executive measures.
Madhavi Arora and Harshal Patel from Emkay Global noted in a memo dated October 30: 'The usual puppet presidency dynamic may not apply, given Trump's inclination to violate long-established norms and his extensive use of executive actions, which could only accelerate in the event of a Democratic victory.'
Impact on Stock Market
For stock markets, political uncertainty arises at a time when US stocks are showing significant momentum, yet financial conditions have tightened, and energy prices remain high. These factors, according to the brokerage house, could limit capital appreciation.
However, historical trends offer some reassurance. According to Emkay Global, the S&P 500 index has historically risen by an average of about 6 percent over 60 trading days following previous midterm elections, reaching 12 percent over 120 days and 17 percent over 180 days.
The brokerage firm also believes that a period of heightened political instability in the US could increase the relative attractiveness of other emerging markets, including India. Nevertheless, the extent of the benefit will depend on how the political confrontation affects the dollar, US Treasury yields, global risk appetite, and foreign investment inflows.
Impact on Commodities
For commodities, the impact of the elections will depend more on policy outcomes than on the political result itself. Analysts at Motilal Oswal Financial Services believe that a Republican victory could signal broader fiscal expansion, persistent uncertainty regarding tariffs, and higher inflation risks, which could potentially support US Treasury yields and the dollar, while creating short-term headwinds for gold and silver.
On the other hand, Democratic control could limit further fiscal expansion and ultimately temper expectations for economic growth, bond yields, and the dollar. Simultaneously, increased political confrontation in Washington could boost demand for safe-haven assets, potentially supporting precious metals.
Navneet Damani and Manav Modi from Motilal Oswal Financial Services wrote in a memo dated October 30: 'For crude oil, the elections matter primarily through US foreign policy, Iran, and sanctions, while copper and other base metals will remain between the US growth forecast and tariff direction.'
Geopolitical events could further complicate the outlook. Damani and Modi added that any resumption of escalation in the Middle East conflict could restore a geopolitical risk premium for crude oil, increase inflation expectations, and raise Treasury yields.
This could create a complex environment for financial markets, where geopolitical uncertainty supports demand for gold, while higher bond yields simultaneously act as a counterweight to precious metals.
