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Reacting to the US mid-term election results

On the back of the election results, US and European equity futures are up about 1%, as one source of political uncertainty has been resolved. In our estimation, this reflects a market refocus on fundamentals that remain positive for equities, especially in the US, and will not meaningfully change with a Democratic House.

Rather, we expect political gridlock for the next couple of years, which will likely keep any additional significant fiscal spending at bay. This downward pressure on yields has already been felt in the 10 year Treasury Note, whose yield was down about 5bps, also reflecting a marginally less hawkish Fed in light of less domestic stimulation. With the fall in yields, the US dollar is also under pressure and the DXY Index is down 0.8% since the election results became clear.

There are some important implications of the results for the next few years and the 2020 presidential election that are important not to overlook.

First, the likelihood of a Trump impeachment is meaningfully lower: Nancy Pelosi, the frontrunner for the next House Speaker, said on Tuesday night that the House would only vote on impeachment if there was clear bipartisan support. Absent Mueller presenting a “smoking gun,” it seems unlikely such support would manifest itself, especially as Republicans add to their majority in the Senate.

Second, with a majority in the House, Democrats now control committees that oversee executive agencies and have the power to hold hearings and subpoena witnesses. While many of these committees subjected the Trump administration to little scrutiny under Republican control, Democrats have made it clear they will be more forceful in their oversight role.

Third, Democrats also picked up seven governorships, some in key swing states like Pennsylvania, Michigan, and Kansas. With the 2020 US Census and the redrawing of district maps at the state level thereafter, Democrats will certainly use their new advantage to undo Republican gerrymandering of districts or engage in their own. In Florida, a ballot measure to restore voting rights for most felons who have completed their sentences passed, which will re-enfranchise nearly 1.6 million people (Source: The Washington Post) and tip the balance in this critical swing state.

Finally, despite losing the race for the Texas Senate seat, Beto O’Rourke’s strong performance (losing by about 2.5%) provides the Democrats with a strong contender for the 2020 presidential election. All of this suggests that despite performing at about expectations, Republicans may face a much more challenging environment in 2020, adding uncertainty to markets that investors will face sooner rather than later.

Olivier Marciot , November 19

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