By: Miles Pearson – Forex Focus
A run-up to the mid-term polls in the United States and the likely impact on global markets
The mid-term polls in the United States are expected to be held on November 6 of this year, with the Republicans currently controlling both chambers of the Congress: the Senate and the House of Representatives. Held in the middle of the US president’sfour-year term, this year’s November polls will decide if Republicans will continue to dominate both houses of the Congress, a very rare event, until the next presidentialelection, which is likely to be held in November 2020.
US Senators are elected for a period of six years, while US Representatives are chosen for two-year terms. As it stands, the Senate has a total of 100 seats, while the House of Representatives has 435. Typically, more than 30 Senators are re-elected every two years, with this year’s number at 35; whereas all of the seats will be up for grabs inthe House of Representatives.
Currently, Republicans havemajoritiesin both houses of Congress. In the Senate, the Republicans lead with a wafer-thin margin of 51-49, while in the House of Representatives, the break-up is 238-197 in favour of the Republicans, with six seats sittingvacant.
US President Donald Trump came to power on the back of promises to protect American jobs by pursuing aggressive immigration and trade policies to boost economic growth. Applying the import tariffs on steel and aluminium is one such aggressive approach, which has no doubt kickstartedthe US steel industry, with capacity utilization rising above 80 percentfor the first time in four years. But, since the eruption of the trade war, the Chinese yuan has also weakened against the US dollar, offsetting some of the impact on Chinese exporters. And with US steel producers competing with the Chinese, the rising cost of steel and aluminium in the country is hurting businesses that operate on wafer-thinmargins and consumers alike, driving up inflation along with interest rates. Likewise, backing out of the Iran deal has led to mounting oil prices, with one of the world’s major suppliers in the dock. Thirdly, the massive tax breaks to corporates and a spike in government spending has led to a massive increase in the budget deficit, which many analysts believe could hurt the country’s growth in the long run.
Coming to the markets, although there is no clear historical evidence on how the financial markets perform post the mid-term polls, Wall Street will be closely eyeing the upcoming elections, as a shift in the balance of power could lead to upheaval in some of the country’s ongoing policies on immigration, foreign relations, fiscal deficit and tax cuts. The S&P 500 has been on a roll, rallying around 22 percentlast year and is up about 3 percentin the first eight months of 2018, resulting from swelling corporate profits on the back of tax cuts passed by the Trump Administration in December of last year. However, a loss in the mid-term polls could derail the second instalment of tax reforms, which is directed towards the individual taxpayer and includes a proposal for permanently implementing tax breaks for individuals in addition to offering incentives for retirement savings.
Analysts, however,remain cautious when it comes to interpreting correlations between market performance and mid-term elections. Chief strategist at DeutscheBank, Binky Chadha, correlated historical returns on the S&P 500 Index around mid-term elections with changes in the ISM’s (Institute for Supply Management’s) activity index and found the correlation between the two to be in excess of 75 percent, indicating that growth was the key driver for the returns, with seasonal factors acting as the secondaryindicator.
According to Bloomberg, purchasing stocks in the MSCI Emerging Markets equity index on October 31 and selling them a year later has returned an average of 23 percentduring US mid-term elections when compared to average gains of 9.3 percent during a similar period. The analysis has been backed with data from 1990 and urges emerging-market investors to ride out the volatility prior to the polls and wait for the rally.
Call it coincidence or bad timing, historical stats have shown that the party represented by the US president has lost most of the mid-term elections since 1958, barring a couple of exceptions. With less than a month and a half left before the polls, geopolitical risk has only escalated, and with global trade tensions mounting, President Trump’s approval rating has nosedived to about 40 percent, raising hopes for Democrats to regain control of both chambers of Congress. Added to that were the high-stakes negotiations surrounding the NAFTA (North American Free Trade Agreement); the threat of losing the Congressional majority may have hastened President Trump to reach a trade deal with North American counterparts and find a solution to the ongoing trade dispute with China, although not everyone is convinced that Trump will double down on his rhetoric. However, if this does happen, the greenback could reverse some of its recent gains, especially against emerging-market currencies, spurring a stock-market rally in these countries.
After all is said and done, nothing can be taken for granted in politics.