The popular vote in the US was slightly more anti-Trump than anticipated, which will see the Democrats gaining a larger majority in the House than expected, but Republicans will solidify their majority in the Senate.
First the market impact takeaway:
First things first – we see little immediate takeaway from this midterm election result in currency terms – we will very quickly get back to focusing on the US-China trade relationship into the end of this month and the G20 meeting between Trump and Xi and any signaling in the wake of that meeting. We’re not hopeful for any US-China trade deal beyond a “ceasefire pending further negotiations” that could drag on. There is a rich vein of anti-China sentiment to mine in the US on both sides of the aisle. If anything, Trump may even get more tough on China in a doubling down on this populist issue. And while the kneejerk reaction has seen the USD weaker and bonds a bit higher – we suspect the fiscal deficit expansion risks may be worse as both sides vie for the populist vote leading into what will be an inevitably divisive 2020 election spectacle.
The results from the US midterm elections streaming in overnight provided a few crosscurrents before the weight of the Democratic popular vote quickly showed up later in the night and pointed to a strong, if not overwhelming shift in the House makeup, where the Democrats look to gain a solid majority of around 25 seats.
The Senate was another story, as the Republican looks to pick up at two or more seats there. In fact, overnight, a few early Senate races were moving more in the Republicans’ favour than anticipated and the surprisingly weak showing for the Democratic governor candidate in Florida as well as a handful of other results saw a flurry of USD strength and risk-on behavior before the anti-Trump popular vote became clearer later in the evening.
A handful of takeaways, few if any of which will have an immediate market impact:
Gridlock to reign – we look for Dems to feel emboldened, if not sufficiently so to launch an impeachment effort (which needs the Senate for an actual impeachment to occur anyway). In that light, look for the Democrats to block and obstruct any further Trump deregulation efforts – anything seen as favouring big business and especially big financials and the elites.
The Trump strategy will have to be to offer progressive, populist measures that favour low- and middle-income voters like minimum wage reform (tax incentives are meaningless as a huge swath of low-income earners effectively don’t pay any income tax) or anything and everything healthcare related – especially drug pricing. An infrastructure deal is theoretically possible, but the Republicans prefer public-private partnerships over direct spending and this could lead nowhere. Still, the risks lean to more fiscal spending and larger US deficits rather than less.
Dems will try to take down Trump a few notches – the Democrats will now take the Chair position in many House committee and new rules allow the Chair to subpoena information/documents without approval from the rest of the committee. Think Trump tax returns, Trump real estate dealings, etc… anything and everything to tarnish Trump’s image. And expect Trump to go ballistic in his own defense. This and the gridlock issue we mention above will make for an ugly political environment.
Trump to double down on populism? Trump only cares about his popularity rating, not ideology, and will do whatever he can to find scapegoats for his popular failure at the polls.
What is the quality of Democratic support? Much of the swing in favour of the Dems looks inspired by dislike for Trump, with women and suburbanites said to be those that changed their minds in largest numbers since the 2016 election cycles. The Democrats don’t have a clear vision for the US’ future – many are uncomfortable with the more openly progressive wing of the party. Not sure how this shakes out, but let’s not read this election result as positive all around for the Democrats.
A small aside on the Mueller investigation: one of the networks discussed polls of the Mueller investigation and showed that a majority believe that the look at the Trump campaign’s link to Russia it is politically motivated and that Mueller is not particularly popular. I wouldn’t expect a strong impeachment effort from the Democrats in general from the Democrats linked to anything Russia. Instead, I would expect an attempt to bring down Trump’s popularity as noted above with simply aggressive PR.
Chart: USDJPY
USDJPY remains our favourite barometer for the US dollar at the moment as it is buffeted both by risk appetite and the direction of bond yields. The initial reaction has seen a mildly weaker USD, especially mild in USDJPY terms. In our view, the main US stimulus was already in the rear view mirror and we weren’t looking for more, so the changed Congress doesn’t immediately alter the playing field. The 113.39 high and Fibonacci line remains the pivot level if this kneejerk sell-off (actually more of an overnight pump and dump as headlines crossed the screen) holds lower. Waiting for the close of this week’s trading before assessing the situation is a prudent stance.
