Investors grapple with an uncertain U.S. midterm election outcome on Wednesday, as a better-than-expected performance by Democrats clouds the outlook for issues including fiscal spending and regulation, although some form divided government seen as good for equities could still shape up.
Congressional control was still up for grabs early Wednesday, with several crucial races not called. Prospects of a Republican “red wave” had evaporated even though in the House of Representatives Republicans remained favorites to win a majority. U.S. stock indexes opened lower as uncertainty surrounding the voting results weighed on the mood, with investors focusing on October’s important consumer price index report released on Thursday. The US dollar was stable.
With Democrat Joe Biden in the White House, Republicans taking the House would lead to a divided government, an outcome that has been accompanied by positive long-term stock market performance in the past. COMMENTS: ALEC PHILLIPS, ECONOMICS RESEARCH, GOLDMAN SACHS (via email) “While the Democrats have exceeded expectations and Democratic Senate control would be a surprise, the end result nevertheless appears to be a divided government and the political implications are broadly similar to what one would have expected with Republican majorities in both houses.”
“Senate control matters far less if Republicans have won a majority in the House. There are two general differences between a divided Congress and a Republican Congress. First, the Senate confirms presidential nominations by simple majority, so Democratic control continued would limit Republican influence over President Biden’s nominations over the next two years.Second, passing legislation in a divided Congress would be more difficult than in a Republican Congress, although in one or the other scenario, bipartisan support would be needed (because President Biden could veto either scenario, and the Republicans wouldn’t have the 2/3 vote to cancel) so that the volume of legislative activity could be similar.” “Under a Republican House and a Democratic Senate in 2011 and 2013, uncertainty over the debt limit disrupted financial markets and led to substantial spending cuts. A similar scenario could play out next year, even if a Democratic Senate would make it less likely that a debt limit deal would involve spending cuts of the kind enacted in 2011. A legislative response to a possible recession would also be more difficult.
FLORIAN IELPO, PORTFOLIO MANAGER, LOMBARD ODIER ASSET MANAGEMENT “The prospect of this inflation figure overshadows everything else, including the political situation in the US. We need lower inflation to keep our eyes on the Fed and start to look elsewhere.”
MICHAEL HEWSON, CHIEF MARKET STRATEGIST, CMC MARKETS, LONDON “If the Republicans can get a blockage in one of the chambers, then ultimately it might be less inflationary because it will mean the Democrats can’t spend as much money. money, so in terms of returns, that could be a good thing.
“That’s potentially also positive for equity markets and that’s probably why we’ve seen a weaker dollar, but obviously the focus remains on tomorrow’s CPI numbers and in particular the base number.” FIONA CINCOTTA, SENIOR MARKET ANALYST AT CITY INDEX, LONDON.
“It looks like it’s a little tighter than expected. Republicans are still expected to flip the House of Representatives. “We see Washington locked in as dollar negative. Any restrained spending measures could bring inflation down and potentially we could see less aggressive moves from the Fed.
STUART COLE, HEAD MACRO ECONOMIST, EQUITI CAPITAL, LONDON enough to take control of at least the House and that alone suggests a political stalemate in the future.
“It will almost certainly be an end to the tax hikes the Biden administration has been talking about imposing on American businesses and the wealthy. It also means an end to the loose fiscal policy that Biden was pursuing. This is particularly important because it removes a source of stimulus from the economy and makes it a bit easier for the Fed to get inflation under control, in that it may allow for a lower terminal rate battle over raising the US debt ceiling and the outlook of government shutdowns while Democrats and Republicans argue over it.
“For markets, a stalled administration should be positive for equities, given that it makes things a bit easier for the Fed.” DANNI HEWSON, FINANCIAL ANALYST, AJ BELL, LONDON:
“The fact that we haven’t seen a Republican landslide like many people expected now raises questions about whether or not the Democrats will retain control of the Senate. You’re in a slightly different situation and it Seems like the Biden presidency hasn’t been hit hard by this midterm election, so markets are in wait-and-see mode.” CHARU CHANANA, MARKET STRATEGIST, SAXO MARKETS, SINGAPORE
“The race seems to be tighter than expected, especially for the Senate. If the Democrats take the Senate, it will be a huge embarrassment for the Republicans even if they (they) take the House.” US index futures have turned negative, and I think (the) dollar could go higher if the Democrats retain the Senate.”
GARRETT MELSON, PORTFOLIO STRATEGIST, NATIXIS INVESTMENT MANAGERS SOLUTIONS “The likely outcome (of the election) is a stalemate of one form or another. A divided government reduces the likelihood of significant legislative changes, thereby reducing political uncertainty – an advantage for risky assets.
“Looking to mid-to-late 2023, we could see delayed effects of the election as the debate over the budget and the debt ceiling comes into focus. If Republicans take one or both houses of Congress, expect a potentially contentious political crisis that could contribute to some market volatility in 2023 before an eventual resolution is reached.” QUINCY KROSBY, CHIEF GLOBAL STRATEGIST AT LPL FINANCIAL, CHARLOTTE, NC
“Some of the key races are pretty close. It’s going to take some time to see who wins but it’s surprising… We already have a deadlock scenario as the Republicans are going to take the House. The market can accept the deadlock. This means that many administration actions will be thwarted by the opposing side. “That said, if Republicans take the Senate with the House, that provides a business-friendly backdrop for the market.”
RANDY FREDERICK, VICE PRESIDENT OF TRADE AND MERCHANDISE, CHARLES SCHWAB, AUSTIN, TEXAS “Obviously we don’t have 100% reporting on anything yet, but it doesn’t seem like everything we have seen so far has spooked the markets.”
ASH ALANKAR, HEAD OF GLOBAL ASSET ALLOCATION AT JANUS HENDERSON INVESTORS “On the one hand, the reduced likelihood of corporate and personal tax and capital gains tax increases that accompany a Republican victory , will be a tailwind for all equities… At the other end, the prospect of no tax hikes and an extension of Trump’s tax cuts is potentially inflationary, as the private sector has more after-tax income.
“A Republican victory will generally be positive for equities, but inflation risk is unlikely to be mitigated or accelerated.” TROY GAYESKI, CHIEF MARKET STRATEGIST, FS INVESTMENTS, NEW YORK “In the event that the House and Senate flip, it could lead to some sort of miniature sideways bearish rally, but ultimately Fed tightening , a contraction in the money supply and an inevitable recession will dominate the changing political landscape in the United States
“When you think about the order of importance for the markets, it’s really the Fed, the economy, the very troubling situation overseas and intermediaries, they’re just not very relevant over the past 6 , 12, 18 months, because they’re really almost a non-event.” If Congress flips, that could be seen as good news by investors, because it means the fiscal stimulus is over and, in margin, it might make the Fed’s job of breaking inflation a bit easier.”
JJ KINAHAN, CEO, IG NORTH AMERICA, CHICAGO “Having a balanced ticket in terms of Republicans, whether they get the House and the Senate, or just the House, will help slow some of the government spending that many have seen as one major contributors to inflation. So it could help do some of the Fed’s job for them, so to speak, and that’s why it would be viewed favorably by the market.”
BROOKS RITCHEY, CO-CIO, K2 ADVISORS “If we get a divided Congress, we may have to adjust our portfolios to be less defensive than we are today.”
IPEK OZKARDESKAYA, SENIOR ANALYST, SWISSQUOTE BANK “From an investor perspective, a Republican victory in both houses is a good result for stocks. And even a divided government, which we will certainly get, is better for stocks than a Democrat win.”
JACK ABLIN, CHIEF INVESTMENT OFFICER, CRESSET CAPITAL, CHICAGO “I think the markets are rallying to the prospect of a stalemate.
“Fiscal spending has created a challenge for central banks around the world. The prospect of no legislation is a bullish inflation signal.” (Compiled by the Global Finance & Markets Breaking News team; editing by Christopher Cushing and Tom Hogue)
(This story has not been edited by the Devdiscourse team and is auto-generated from a syndicated feed.)
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