US mid-term elections to shake the markets 

The US midterm elections, are in the market’s focus, as nothing less than US President Trump’s total control over the US administration is being set into doubt. All of the House of Representatives 435 seats and about a third of the Senate’s seats are up for grabs. Currently Republicans control both chambers of the US Congress allowing for US President Trump’s policies to pass into law, with a relative ease. Yet polls seem to show that the Democrats may be able to flip one if not both Chambers of Congress.

Thus, the high stakes are also accompanied by high uncertainty about the outcome, making the elections an explosive mix for the markets, given also the high polarization in the USD society. Closely contested races may further complicate the process, potentially delaying the announcement of definitive results. Particular attention is being directed towards the Alaska Senate race, amid recent developments concerning behind-the-scenes political manoeuvring. The Michigan Senate contest has also attracted attention following US Representative Haley Stevens’ decision to change her endorsement in favour of the Republican Senate nominee. 

Nevertheless, should the election result be clear and announced relatively fast there may an initial market reaction, yet we still view the long term implications of the election results as possibly the key determinant factor behind the market’s reaction. The Midterm elections may have wide fiscal, economic and regulatory effect yet possibly will be less influential for the Fed’s monetary policy as the central bank acts as in independent organization. Thus we highlight the effects on the US equities markets, gold’s price and the USD in the FX market, while the trajectory of US Treasury yields could also be affected and is expected to remain a key determinant of market performance. 

We tend to categorise the market’s results broadly upon the outcome, depending the width of control the Democrats may gain over the US legislative bodies.  

First scenario, which seems unlikely yet still possible, could be that the Democrats will fail to flip any of the two Chambers allowing for Republicans to maintain control over the House of Representatives and the US Senate.  Such a scenario could be credited as an approval of US President Trump’s policy and be a considered as his personal triumph, allowing for even bolder policies and more extreme to be implemented. Such a scenario could mean even lower regulation and may boost riskier assets such as US equities and the Crypto market.

Especially the prospect of an easier if any regulation on AI could lift US equities, while the possibility of an easier regulatory framework for Cryptos could also lift the crypto market. Also such a scenario could allow for a deeper US national debt and wide fiscal stimulus, possibly supporting US treasury yields and the USD while at the same time weigh on gold’s price. We view this scenario as possibly taking the markets by surprise and thus enhancing its reaction as the market would have to re-adjust its expectations.   

Alternatively, a divided Congress, with each party controlling one chamber, regardless which one, could signal a political gridlock, but still put an end to US President Trump’s unrestricted reign. Such a scenario is expected to limit substantially the prospects of key legislation to be passed by both chambers, as it could also limit a substantial fiscal expansion given the high US national debt. Such a political uncertainty could lift the USD, limiting gold’s upside potential and at the same time weigh on US equities somewhat and possibly also weigh on the crypto markets.  

In a third scenario, should Democrats secure control of both chambers of Congress, the administration could face significant obstacles in advancing its legislative agenda. Such an outcome may weigh on US equities, particularly the technology sector, given concerns surrounding tighter artificial intelligence regulation and increased regulatory scrutiny. Furthermore the crypto-market may suffer as the prospect of a tighter regulatory environment would emerge. A potential deterioration in equity market sentiment, combined with weaker growth expectations, declining Treasury yields and a weaker US dollar, could provide support for gold. However, concerns regarding the sustainability of US public debt could push yields higher despite dollar weakness, creating a more mixed environment for the precious metal.

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