While the midterms delivered very little surprises the outcome cause an element of volatility in financial markets. The Result which saw Democrats regain the house whilst Trump’s Republican retained control of the Senate. Trump has enjoyed a carte blanche approach to policy and change, a luxury which will almost certainly change now. The result leaving the Republican and Democrats in a power-sharing arrangement.
The Democrats enjoyed significant gains in the midterms notably in the statehouses. Whilst the Democrats ended up with 225 seats in the house representatives an outcome that was viewed favourably by equities market with stock markets rallying.
The Democrats seizing power of the house of representatives firmly signals the end of Trump’s unchecked reign. The Democrats’ victory indicates the first time the Democrats have held control of the house in 8 years. Democrats also retained a handful of Senate seats in key Republican territories and obtained House districts in states such as Kansas, New Jersey, Virginia, Pennsylvania and Michigan.
Despite the clear slide of power, President Trump applauded the evening’s success thanking all of the party followers on Twitter.
Democrats will now have the opportunity to influence economics issues, taxes and healthcare policies. Potentially more discouraging for Trump, the Democrats will have the platform to launch probes into Trump and his cabinet members and their tax affairs.
Arguably the tension was shown in one of the first conducted interviews when Trump appeared very uncomfortable when faced with questions about immigration and Russian collusion.
When quizzed on Caravan, a group of migrants who entered the US and his previous comments where Trump labelled their immigration to the US as an ‘invasion’ CNN’s Jim Acosta requested he substantiated his comments.
Jim Acosta then briefly quizzed the president about the ongoing investigation and the possible collusion with the Russians and was immediately dismissed with a Republican representative attempting to prize the microphone from his hands.
The Midterms outcome will almost certainly change the landscape of US economics and potentially offer the Democrats a platform to launch a success 2020 presidential challenge. The bipartisan approach moving forward will see Trump struggle push many of his plans through Congress making more tax cuts highly unlikely. This, in turn, should see US interest rate rise in line with inflation and should lean nicely toward the future US rate hikes.
Trump will still have the ability to negotiate on trade and could potentially focus even harder on policies he can govern, including the trade war.
Many analysts are now predicting that Trump will tighten his grip on Beijing. The two parties are due to meet at the next G20 summit at end of November and whilst Trump has insinuated a deal can be done it will be interesting to see how negotiations fair.
Reverberations of the midterm elections were seen throughout Financial Markets with equities rallying alongside US bonds. The dollar meanwhile fell with investors dipping their toes into riskier assets. Investors believing that result will lead to a more stable approach to policy-making and decisions that will lead to a better economic outlook.
The outcome propelling the EUR/USD spike to 1.1495, a 3-week high which has since corrected to the Dollar’s favour. The pair closing at 1.1336 on Friday.
Dollar gains were fuelled by a positive FOMC meeting where the FED highlighted the strong US economy with the only comment of concern surrounding slowing business investment, a trend which might be eased with a potentially more balanced government.
Other key pairs also benefitted from the dollar weakness Sterling US Dollar breaching the 1.31 mark, the pair touching a multi-week high of 1.3161 before correcting in the dollar’s favour. The pound exchange rate pricing has leant towards a ‘Deal’ outcome with the EU, with rumours circulating that a secret deal may already be in place.
Analysts believe this is being priced into GBP pricing and could falter over the next week if a potential deal doesn’t get the required support from parliament. GBP-USD close the week at 1.2971 with the momentum back with the Dollar.
Whilst decision remains split on whether the USD will prosper at the same rate due to the previously aggressive approach that Trump has taken, and the real possibility of him struggling to now get approval from Congress on many key policies. Trump’s tax cut propelled the economy forward and now the implementation of policies such as these will now take longer or immediately be dismissed.
Expect the FED to comment more openly on the Dollar as the possibility of Fiscal Stimulus is no longer an option. The next key focus for the Dollar will be the outcome of the November trade talks.