World markets looked favourably on US election results that punished the president Barack Obama's Democrats yesterday, with US futures and Asian stocks rising on the news.
But reaction was muted before an expected Federal Reserve announcement on monetary easing. US futures rose overnight as voters swept Democrats from power in the House of Representatives and increased the number of Senate Republicans in a sharp rebuke to Mr Obama. But the gains in futures melted as investors shifted their focus to the Fed.
The Republican victory was viewed as a move towards a more business-friendly environment as voters protested against high unemployment and a sluggish economic recovery.
Asian stocks were mostly higher as markets there digested the news then refocused their attention on the Fed's plans to stimulate the world's biggest economy.
The Democratic Party retained control of the Senate, where the Republican-leaning Tea Party won at least two seats.
The division is a sign that fights over taxes, deficits, health care and financial regulation are looming. But investors appear to have already factored that outcome into stock prices.
The key issue is whether the two parties can work together, said analysts at Bank of America Merrill Lynch in a report.
"A popular Wall Street adage is that 'gridlock is good' because it keeps the government from implementing new policies that further intervene in the private economy," said the report. "However, the short-term gridlock is very bad for the outlook, in our view."
Republican control of the house will weaken Mr Obama, who had battled against the opposition in the fight for approval of his landmark reforms of Wall Street regulation.
"The ability of this administration to get major new programmes done was already limited. This just seals the deal," said Jaret Seiberg, a policy analyst at the investment advisory Washington Research Group.
Wall Street closed higher on Tuesday before investors shifted their focus to the Fed. Stocks have risen for months on the prospect of stronger Republican influence.
Stocks of health insurers and financial companies are likely to rise even if a complete rollback of healthcare and Wall Street reforms is unlikely.
Exit polls found voters deeply worried about the economy, with eight out of 10 saying it was a chief concern. Nearly three quarters believed government did not function properly, and four of every 10 voters said they supported the Tea Party movement.
"Our new majority will be prepared to do things differently," John Boehner, a Republican who is likely become the next Speaker of the House of Representatives, told supporters.
"It starts with cutting spending instead of increasing it, reducing the size of government instead of increasing it and reforming the way Congress works."
* with Reuters and Associated Press
