Investors Are Missing The MidTerm Market Risks

Authored by Steve Englander via Standard Chartered Bank,



  • Investors are ignoring the US mid-terms so far 




  • A big Democratic House win could shift expectations for 2020 in a less market-friendly direction, but would probably help bond markets, weaken the USD and unwind EM risk aversion




  • Republicans keeping the House would probably be modestly asset market- and USD-friendly




  • The question for investors is, how ‘big’ is a big win?




What happens if the Democrats win the mid-terms?

Investors are not paying much attention to the US mid-term elections so far. We focus on the implications of the House elections for asset markets, because the two-year cycle makes the results easier to analyse compared to the timing and composition of Senate elections, which are staggered every two years, with about a third of the Senate up for re-election this year. Given Republican electoral advantages this year, loss of the Senate would be a major negative sign for the Republican Party across the board in 2020.

How big a majority would the Democratic Party have to win in the mid-terms for investors to worry about a sharp shift further ahead in the political climate for business? We also consider what would allow the Republican Party to retain Congress and the White House in 2020. 

We present four scenarios for the House. Several of these are negative for US equity markets and the USD; however, EM and other G10 currencies could benefit. The current administration’s policy moves have been very friendly to US asset markets, but may have had negative spillover abroad. Many of these effects, but not all, could be reversed if Democrats regained power.

No Democrat in the House or Senate voted in favour of the Republican tax bill last year, and there are indications that the Democratic Party’s grassroots movements are turning much more progressive. We see a real possibility that a Democratic Congress would repeal or sharply revise the tax reform bill. 

If investors believe that a ‘big blue wave’ is coming, they should consider how asset markets will look, even if it takes the wave two years to reach shore. As the Electoral Heatmap points out, winning the election is less about converting voters from the other side than mobilising voters. A big Democrat win in elections that normally generate low participation would suggest that President Trump inspires more passion among his detractors than among his supporters.


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