US: Midterm elections resulting in market mayhem? – Westpac

Sean Callow, Research Analyst at Westpac, notes that this week the markets turbulence has continued with the S&P 500 falling to lows since May before rebounding off the lows while the US president kept his eye on the market.

Key Quotes

“There is little doubt that Tuesday’s US midterm elections are important for markets. All House seats are up for election but only 35 of the 100 Senate seats. Political site Fivethirtyeight.com places around an 85% chance of the Republicans keeping the Senate and the same chance on the GOP losing the House, which they have held since 2010. This would mean Democrats would set the policy agenda on a wide range of issues and take control of committees with sweeping powers.”

“President Trump’s approval rating implies the Democrats have a strong chance of taking the 23 seats they need for control.”

“Some high profile equity fund managers have expressed concern that a Democrat House will find little common policy ground with a Republican Senate and White House. This makes some sense – at the very least, there would be no prospect of the tax cuts President Trump has been promising. Talk of impeachment would also hit the headlines.”

“Yet polling has been pointing to a Democrat House for months, so perhaps it is all factored in. And the Fed is very unlikely to be swayed from a Dec rate hike even if stocks tank post-midterms, given the tight job market, robust GDP including consumer spending and inflation already at 2%.”

“Still, there will be plenty of tension as the results are released during Sydney trade Wed.”

“Markets may not be ready for a (moderate) surprise such as the Republicans holding both houses. It should be lively either way, overshadowing the FOMC meeting.”