By Bas van Geffen, Senior Macro Strategist at Rabobank

Associated Press is calling the Congressional race in favour of the Democrats. The party wins both the House of Republicans and control of the Senate, changing the balance of power when the new Congress convenes at the start of 2027. However, President Trump still has the powers of veto and executive order, creating a divided government in the US.

The blue wave that swept through Congress will affect the policies that are proposed from next year, but Trump will probably veto any bill that he does not like. “I have the ultimate power – it’s called veto,” he said in an interview before voting closed, adding that “if we didn’t win, I veto everything. I’ll be vetoing, vetoing”. And, despite the Democrats’ big win, they will not have the required two-thirds majority in both chambers to overturn a veto. So, their policy proposals may not get far. 

Trump added that his veto powers will eventually force the Democrats to make deals with him. But it may not be so easy to make concessions. Both parties share little common ground, so our US strategist believes that a legislative gridlock is the more likely result. 

That’s particularly problematic for fiscal policy. Gridlock should limit additional spending or tax cuts, but the divided government also reduces the odds of a serious effort to shore up public finances. As a result, the term premium will probably remain a force keeping US long-term rates pinned at higher levels.

A first government shutdown approaches on December 11, and the debt limit may lead to more political brinkmanship in 2027. Aside from the uncertainty that this creates, the US economy should not expect any meaningful fiscal impulse. So, these results could weigh on US equities. 

Meanwhile, President Trump may also test how far his other “tremendous power” reaches. Given an unsupportive Congress, the president will probably try to implement his policy agenda through executive orders. That particularly allows him to continue course on foreign policy, trade policy, and immigration.

That includes the decision on the way forward in the Middle East. The decision to attack Iran again, or not to, lies with the Commander in Chief. President Trump is showing restraint for now. He told the Financial Times that “We’re locked and loaded if we need to [strike Iran again], but there may be no reason for it.” 

Oil futures fell sharply earlier in the week, after Trump indicated he wants to give diplomacy another chance, and front-dated futures have stayed lower since then. However, the recent rise in 2027 pricing suggests that markets may be shifting expectations to a scenario of tight supply and elevated transport costs into next year. To reiterate, we remain sceptical that there is enough common ground for a deal between the White House and Tehran, and believe that escalation in the coming weeks is likelier than not.

And, finally, by winning the Senate, Democrats can now also effectively block Trump’s appointments. That includes potential replacements for Fed Governors Cook, if she is forced out, and Powell, if he decides to resign from the central bank’s board.