Stocks rise after GOP House takeover

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Published: November 3,2010

LONDON — World stocks were slightly higher Wednesday as markets digested news that Republicans gained control of the House in midterm U.S. elections and attention refocused on the Federal Reserve’s plans to stimulate the world’s biggest economy by expanding the money supply.

Investors expect the Fed to announce later in the day additional purchases of government-backed bonds, creating new dollars to lower market interest rates, boost credit and economic growth. The size and duration of the program will be key to investors’ reactions.

In Europe, Britain’s FTSE 100 was up 0.1 percent to 5,761.50. France’s CAC-40 was up 0.3 percent to 3,878.91, and Germany’s DAX rose 0.3 percent to 6,671.85.

Asian markets closed mostly higher and Wall Street was expected to remain steady on the open – Dow futures were flat at 11,148 as were Standard & Poor’s 500 futures, at 1,193.10.

Investors took in stride U.S. midterm congressional elections, which put Republicans – riding a wave of voter discontent over America’s economic woes – in control of the House. President Barack Obama’s Democratic Party retained control of the Senate, where Republicans from the anti-tax, anti-spending Tea Party movement won at least two seats.

The divided government was a sign that fights over taxes, deficits, health care and financial regulation were looming and could result in paralyzing uncertainty for the world’s No. 1 economy. But investors seem to have already factored that outcome into stock prices.

The key issue is whether the two parties can work together, analysts at Bank of America Merrill Lynch said 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,” the report said. “However, the short-term gridlock is very bad for the outlook, in our view.”

With the election results clear, investors turned their attention to the outcome of the Fed’s policy meeting Wednesday. The central bank is expected to announce the details of its plan to stimulate the economy by buying bonds. The plan, known as quantitative easing, makes stocks a more attractive investment by lowering bond yields.

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