Next week's US mid-term elections could be closer than analysts expect -- here's what that means for markets

(Matthias Hangst /Getty Images)
  • The US mid-term elections will be held on Tuesday, November 6.
  • Most political analysts expect the Trump-led Republican party to lose control of the lower house, but ANZ analysts aren’t so sure.
  • If it does happen, ANZ said President Trump could refocus on his foreign policy agenda, which “likely implies a tougher stance on trade”.

American voters will head to the polls on Tuesday for the US mid-term elections.

As has been shown in recent years — whether it’s Trump’s election victory, Brexit, or the revolving door of Australian Prime Ministers — political surprises can have a significant bearing on market moves.

Up for grabs next week will be 35 of the 100 seats in the US senate, along with all 435 seats in the House of Representatives. Currently, the Trump-led Republicans have a majority in both houses.

Most political analysts expect the Republican party will maintain its majority in the Senate, while the Democrats will take control of the lower house.

If that does happen, ANZ economists Daniel Wilson and Tom Kenny say Trump will likely renew his focus on foreign policy, rather than domestic issues.

“This likely implies a tougher stance on trade, as this will be the only ‘win’ the President can show his constituents,” they said.

In addition, “a divided Congress will not give the President an infrastructure package and/or further tax cuts”.

They added that most political analysts put the probability of a Democrat-controlled lower house at 75-85%. However, Wilson and Kenny aren’t so sure.

The pair highlighted three main reasons that Tuesday’s battle for the House of Representatives could be closer than analysts expect:

    1. Margin of error on polls;
    2. US economic strength; and
    3. President Trump’s approval rating; and
    4. Voter turnout.

The events of the past couple of years “have taught us that polls can be wrong”.

In addition, strength in the US economy this year has left the unemployment rate at 18-year lows, with signs of upward pressure on wages. Consumer confidence is also high.

“Equity volatility has picked up and rates have risen, but this has not dented real economic activity or confidence yet,” the pair said.

They also noted that President Trump’s approval rating has crept higher in the last couple of months.

“During the primaries, Trump-backed candidates performed extremely well, however on a national stage we do not know how this will translate.”

Lastly, they noted voter turnout at mid-terms is often significantly lower than general elections, and it can often have a material effect on the final result.

With the US political divide more polarised than ever, voter turnout could be higher this time, “this is likely to be the case for both parties”.

If the Republicans do maintain control of both houses, Trump would be more likely to pursue his domestic initiatives such as large-scale infrastructure projects.

In that scenario, “Fed policy may turn more hawkish to offset the fiscal stimulus, and eventually this could weigh on markets”.

However, “over the short term, we would expect this to be positive for equities, the dollar and higher rates”.

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