is less than a month away from the US midterm elections, and this election is regarded as a direct opportunity for American voters to score US President 1 Trump , who has been in office for nearly two years. Several recent polls and betting odds have given their predictions, betting that the most likely result is that the Republican Party where Trump is located will lose control of the House of Representatives, but continues to control the Senate of . If so, it will increase resistance to the Trump administration's promotion and implementation of new policies, especially the controversial economic and trade policies, which will obviously affect the financial market.
However, prediction is just a prediction. In recent years, there are many "black swans" flying out in major elections around the world. In a latest report, the Netherlands International Group (ING) analyzed the four possible outcomes of the U.S. midterm elections, and what impact each will have on the market.
The first outcome: The Democrats regained control of the House of Representatives (more likely)
This is the most likely situation that gambling agencies and poll experts believe is that the Democrats win control of the House of Representatives with a slight advantage, but the Senate is still controlled by the Republicans. After Trump took office, even if the Republicans control both the Senate and the House of Representatives, he has been constrained by Capitol Hill . If the Democrats control the House of Representatives, he will face more legislative challenges. The two parties may agree on issues such as infrastructure spending, but the differences between and within the two parties are still largely difficult to bridge. In this case, Trump may focus more on the policy agendas that executive power can drive, such as trade policy.
As Congress falls into division, the possibility of the U.S. government continuing to expand fiscal policy is reduced, and concerns about the continued debt may ease. The Fed is expected to continue to raise interest rates "gradually", but it may be criticized by Trump. The report believes that this outcome of the midterm elections has a relatively neutral impact on the U.S. economy, but the U.S. government may face the risk of another shutdown.
As for the financial market, the US market is currently strong, and the restricted fiscal policy of expansion may trigger a relatively moderate profit-taking return of the US dollar and US stocks, but there may not be a large-scale sell-off. For other markets outside the United States, there may continue to be pressured to withdraw funds without changing or softening protectionist stance.
The second ending: Republicans win a big victory (medium possible)
report analysis, if the Republican Party continues to take charge of the Senate and House of Representatives after the midterm elections, it will open up a protective umbrella for Trump to continue to promote the "America First" policy, while allowing him to gain stronger support within the Republican Party, which may lead to the Trump administration's further tax cuts and relax financial supervision, and take a tougher stance on immigration and trade issues.
In this situation, the report said that it may stimulate US stock market and domestic demand in the short term, but concerns about the US fiscal deficit, trade frictions, geopolitical environment, and even the US role globally will increase. The Fed may respond to this rate hike. As the Fed continues its gradual rate hike path, differences between Trump and Fed Chairman Powell may intensify. At the same time, the US dollar may further strengthen until 2019, but investors will increasingly worry about the double deficit and seek to sell the dollar when the fiscal stimulus end signal appears, while the US government will move forward with a higher deficit burden.
The third ending: Washington A full-scale "war" broke out (medium possible)
If the Democrats win a big victory in the House and the Senate, then the Democrats will take the initiative to block Trump's legislative agenda, which also means that Congress will be completely deadlocked, with frequent government shutdowns, and a more unstable political environment, and Trump will be limited by executive power. The
report believes that although US economic growth may not be severely affected in this case, political instability will bring headwinds to risky assets. At the same time, the report emphasized that once the "Russia Gate" investigation special prosecutor Mueller finds further evidence related to Trump, Democrats are likely to use their advantages in Congress to start the president's impeachment process.
report said that because it is difficult to push the agenda in Congress in this situation, Trump may further use executive power to make a fuss about trade issues, resulting in an intensified headwind of economic growth. The Fed may be more cautious on the road to normalizing monetary policy, especially if the government shuts down or the president is impeached. The report believes that the Fed is likely to slow down or reassess the need for future policy tightening in the face of these adverse factors. In this situation, the adjustment of the US capital market will fluctuate more than the first situation mentioned above.
The fourth ending: bipartisan "deal" (lower possibility)
If the Democrats at least win control of the House, there is also a situation where there is a lower possibility, that is, Trump and the Republicans choose to put their differences aside with the Democrats for the time being and cooperate with the two parties. The report said that, at least theoretically, further expanding fiscal spending is attractive to both parties. In terms of trade policy, it is not completely impossible for the Republican Party to soften its previous position and the Democratic Party to make a slight compromise. In the situation like
, political risks are greatly reduced, which is good for domestic economic growth in the United States. Fiscal easing under the healthy cooperation of both parties may cause the Federal Reserve to slightly accelerate the pace of interest rate hikes, and the improvement in the global trade situation is also a good thing for the US capital market. However, concerns about medium-term fiscal sustainability will gradually emerge, thereby pushing up long-term Treasury bond yields.
