Mon, Jun 21, 2021 @ 03:11 GMT
HomeContributorsFundamental AnalysisUS Midterm Elections: Mostly a Political Event with Limited Implications for Markets...

US Midterm Elections: Mostly a Political Event with Limited Implications for Markets and the Economy

Key takeaways –macro and politics

  • We believe the US midterm election, which takes place on Tuesday 6 November, is mostly a political event, not an economic event.
  • The most likely outcome is that the Democrats win the House but the Republicans retain Senate control. That would make President Donald Trump a ‘lame duck’ in the sense that he cannot get through with his domestic agenda. Trump’s focus would remain on foreign and trade policy.
  • If the Democrats win the House, we believe they are likely to start an impeachment process against Trump. While this would create a lot of headlines and noise, we do not think he would be convicted, as this requires super-majority in the Senate.
  • Even if the Democrats win control of both chambers, it is difficult for them to roll back Trump’s laws/policies, as Trump can veto any attempt to do that.
  • If the Republicans retain control of both chambers, Trump has another chance to pass domestic policy. If so, Trump may shift focus away from foreign/trade policy and back to domestic policy (new initiatives on tax and infrastructure spending?).
  • As we think the midterm elections are a political event, it does not change our view on the economic outlook. We believe the US expansion is set to continue in coming years, as optimism remains high and fiscal policy remains expansionary

Key takeaways –market implications

  • That the midterm election is mostly a political event and not an economic event means that the market implications are limited.
  • EUR/USD and real rates have moved apart under Trump. In a scenario where Trump ends up a ‘lame duck’ after the midterms, it could support the USD somewhat (and weigh on EUR/USD), as the ‘Trump discount’ may start to be priced out.
  • Risk scenario: Although the probability is very low (<10% in our view), Trump may start US FX interventions in order to weaken the USD, which would reduce the current account deficit and support exports.
  • We believe the impact on US Treasuries is limited. Even if Trump becomes a lame duck, it would be difficult for the Democrats to roll back Trumponomics. The higher government deficits ahead would increase US treasury issuance and put upward pressure on long-end yields. The midterm elections are also unlikely to change the Fed’s outlook. The flattening of the US yield curve remains the main focus.
  • We also think the midterm elections are secondary for equities. This is also what history suggests. We expect a return over the next 12 months of between 5% and 10%, with returns being more dependent on macro than politics.

Full report in pdf

Danske Bankhttp://www.danskebank.com/danskeresearch
This publication has been prepared by Danske Markets for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Markets´ research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S, which is regulated by FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright (©) Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

Featured Analysis

Learn Forex Trading