Markets can’t rely on midterms to change course of Iran war

Prediction markets suggest the Democrats are capable of gaining a majority in both the Senate and the House of Representatives at the US midterm elections on November 3, with Polymarket putting the chance of a “sweep” at 64% as of Friday morning.

Financial markets have plenty riding on what the result of the US midterms could mean for the war with Iran, and above all for shipping through the Strait of Hormuz. Brent crude oil has held at around $100 per barrel in recent weeks, with no timeline for the strait reopening, and the resulting inflation has helped push US Treasury (UST) yields to levels not seen since before the global financial crisis, with the 10-year trading at around 5.16% on Friday morning.

In reality, even a Democrat sweep would not be an immediate gamechanger for markets; it would be more likely to limit future military escalation than relieve the short-term pressure on oil, inflation, and government bond yields.

If the Democrats do take both chambers, they won't be able to end the conflict on day one. The war, which began on February 28 with Operation Epic Fury, would still sit largely under the president's control, with the new Congress not seated until January 3, 2027. A Democratic Congress would have more ways to constrain the campaign, though the most visible one (a war powers resolution) is weak in practice while the most effective (control over funding) works slowly and would draw both sides into a politically risky fight.

Democrats have already forced several votes to rein in the war, and the war powers resolution passed by the Senate in June and the House in July demonstrates how little this measure can achieve on its own. As a concurrent resolution that was not legally binding, it didn't go to President Trump for signature and lacked the force of law, allowing the White House to dismiss it as insignificant and blame Republican absences. That said, these votes still matter politically. War powers resolutions are privileged, which lets the minority force them to the floor and put every lawmaker on record ahead of the midterms.

A new Democratic majority would likely open with a joint resolution, which carries legal force but must go to the president. It would likely pass both chambers, and President Trump would almost certainly veto it. Overriding requires two-thirds of each chamber – 67 senators and 290 representatives respectively – which leaves even a strong Democratic majority dozens of Republican defections short.

Funding gives Congress far more leverage, as the administration needs congressional approval to sustain a large-scale military campaign, and a veto of a spending bill leaves the Pentagon without the money rather than preserving the status quo. The White House will eventually need emergency supplemental funding to replenish depleted missile stocks and cover high operating costs, and a Democratic House could decline to bring those requests to the floor. The Pentagon would then have to shift money out of routine accounts to keep missions running, and larger transfers of that kind need sign-off from the appropriations committees Democrats would chair.

Congress can also add explicit Iran restrictions to annual defense appropriations bills and other must-pass legislation, using “no funds may be used for” language to bar money for ground combat or major offensive escalation. That sets up a game of chicken, with President Trump having to choose between vetoing the entire defense budget and signing a bill that legally limits his options. A US federal government shutdown on its own wouldn't halt operations, since troops keep working as excepted personnel, so the fight turns on specific enacted language rather than a general threat to cut off funds. President Trump would be betting that Democrats won't want to be seen defunding troops in combat, and Democrats would be betting that he won't veto the Pentagon's budget.

Trump's bet has some basis, because any restriction on combat funding will be framed as abandoning service members in harm's way. Against that backdrop, Democratic leadership won't risk being seen to cut off money for defensive operations or force protection. We expect the line to be drawn at escalation instead, with no funds for new ground forces, occupation, or major offensive expansion.

Budget fights take months, and in the meantime, committee chairs in both chambers could call or subpoena commanders and intelligence officials to testify in televised hearings on costs, strategy, and casualty figures directly in front of voters. A Democratic Senate could also delay or reject defense and national security nominees as leverage.

After January, the most likely effect is therefore on escalation rather than on the existing campaign. The blockade, which has kept around 20 Navy vessels deployed for months, can continue on existing authorities and money, while a ground campaign, major expansion or large supplemental request would face a Congress able to say no. Markets had hoped for a ceasefire before the midterms, but with Iran digging in and President Trump left with little room to climb down, each week without one is being priced into oil and rates.

For government bonds, that leaves a binary outcome that is hard to have much conviction on. A ceasefire and a reopened strait would likely trigger a sharp rally in USTs, while a war that drags into next year points to continued upward pressure on yields. Headlines from Washington and Tehran keep swinging between a deal being close and further escalation, and the apparent gap between the two sides' positions remains wide.

With this level of uncertainty, a directional call on USTs would be closer to a coin toss than an investment view, so we remain cautious on the long end of sovereign curves globally.