#Market Strategy — 07.11.2018

US Midterms Elections: Democrats Gain Ground In Congress And Republicans Hold Senate

Guy Ertz

The mid-term elections met consensus expectations for split control of Congress.

The  election  outcome  and political impact

Before the mid-term elections, polls showed a very high probability of a split Congress. This time the polls were right. This was our base case as the Democrats will assume majority in the House and the Republicans keep control of the Senate.

We expect a slowdown in the administration’s deregulatory process. On the legislative side, a divided Congress is unlikely to produce important new legislation There is also a higher risk of government shutdowns. Democrats will have increased oversight over President Trump’s administration. This will likely mean numerous investigations and hearings. There is however a limited scope for a Democratic-led House to reign in President Trump on the trade policy.

Market reaction so far

Given the result,  there is a moderate market reaction so far. The dollar is slightly weaker, the Japanese equity was marginally lower while European market opened higher. Bond yields fell a bit. The outcome was probably already largely in the prices. What the consequences for the real economy and the markets will be, will become more clear in the coming weeks. As we are looking at a divided parliament, most policies that are in place will remain so and it will be difficult for democrats to induce changes.  As for markets, they will probably quickly start to focus on other drivers like the strength of the world economy, earnings growth, Brexit, Italy and the trade wars. From a technical perspective equity markets look  oversold and have a potential to rebound.

Our investment strategy

We keep our positive stance on equities with a preference for the Eurozone, Japan and Emerging markets. The dollar is not expected to weaken a lot before the Italian uncertainty comes down. Short-term we expect 1.16 but on a one-year horizon, we keep 1.22 as our target. Our 12-month target for the 10-year yield is 3.25% in the US and 1.25% for Germany.