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What the US mid-term elections mean for markets

Three very different scenarios are possible as America votes on Tuesday.

This week’s US mid-term Congressional elections will have wide-ranging effects, with global markets closely watching as Tuesday unfolds.

The mid-term elections (which always fall halfway into a president’s four-year term) are seen as something of a referendum on the federal administration.

On 6 November, Americans will vote for all 435 seats in the House of Representatives and around a third of the Senate. 

Both these legislative houses make up the Congress, the American equivalent of our Parliament, and the main mechanism by which a president passes new laws.

Historically, these elections generally produce a negative result for the ruling party – in this case the Republican Party, which currently controls both houses of Congress and the White House.

While pundits have already widely tipped the Republicans to lose their majority in the House of Representatives while keeping the Senate, Thomson Reuters John Noonan told Business Breakfast that anything could happen.

“Who knows? We see a lot of surprises in elections, particularly the presidential election in 2016 which hardly anyone predicted,” he said, referring to the shock victory of Donald Trump two years ago.

Here are the three scenarios that could emerge from the midterms and what they would mean for the market more broadly.

1. Democrats win the House, Republicans retain the Senate

The most likely scenario tipped to occur would see the Democratic Party seize control of the House of Representatives.

While this would mean they would be able to block some of Trump’s more controversial bills from passing, such as greater restrictions on US immigration, Noonan believes the Democrats will be more open to negotiation on other economic issues.

“If there’s suddenly a small majority for the Democrats, they might want to be seen to be making bipartisan efforts, particularly in infrastructure spending,” he explained. “It won’t be entirely gridlock.”

In this case, the market reaction would be fairly muted once the mid-term result passed, Noonan said.

“You might get some knee-jerk reactions but I think the market will move past that rather quickly.”

2. Republicans retain control of Congress

While less likely, if the Republicans were to retain their control over both houses, even with a reduced majority, it would be an boon for markets according to Noonan.

“There’s a 20 per cent chance that the Republicans get both houses which the markets will like,” he said.

That control will ensure Trump can keep moving forward on his proposed tax cuts which are tipped to boost the market, as well as place him in an emboldened position going into trade war negotiations with China. 

3. Democrats win both the House and the Senate

The last of the scenarios is that a ‘blue wave’ of support for the Democrats sees them gain control over the Senate as well as the House of Representatives, but this outcome, Noonan admits, is significant long-shot.

“To get control of the Senate is highly, highly unlikely,” he said.

If that mid-term result were to transpire, it would take much of the wind out of Trump’s sails, and allow the Democrats to easily block any of his proposals, threatening US growth.

“If the Democrats get both the Senate and the House, that will lead to gridlock and markets will sell,” Noonan said.

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