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Are traders underestimating the Republican party?

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US voters go to the polls today in highly anticipated mid-term elections. The stake: who gets to control Congress and Donald Trump’s ability to govern America in the way he wants. For investors who have been enjoying the bull run in US shares, there is much at stake as well. Current polling suggests that the Democrats will take the House of Representatives away from the Republican party.

The contest rests on some very close fights and small swings could produce very different election results. The Republican party enjoys a geographical advantage which means that even a strong swing to the Democrats on a per voter basis may not be enough to secure the House.

Are markets underestimating the Republican party?

Markets do not look as if they are properly pricing in the chance that the Republicans actually get to keep both houses of Congress. This scenario would give Trump more of a free hand in the second two years of his term. This would be good for shares, good for the USD and bad for trade relations with China of course.

“Gridlock tends to be good for the stock market, but in this case, it may not be as positive,” says Neil Wilson, chief markets analyst at Markets.com. “To a degree the recent sell-off could be viewed as market nerves ahead of the mid-terms. Of course, the broader macro-economic  outlook and US growth story is more important, but we must remember that the US boom is a function of Trumponomics – anything that curtails this will be at least mildly risk-off.”

A split Congress will mean Trump will likely still be able to double-down on his tariff war with China: it could result in investors receiving all the anti-growth measures without any of the pro-growth reforms. It would still likely mean a strong USD and strong US stockmarket performance versus the rest of the world.

Republican party sweep would be great for stocks

A Republican party sweep of both houses would see more upside for US stocks, the dollar and US yields. Analysts like Wilson are warning traders about reading too much into the polls, and are arguing that many potential Republican voters will be telling pollsters they plan to vote Democrat.

A Republican win will also likely mean further rate rises from the Federal Reserve further down the line, and a rally in US bond yields, particularly at the front end of the yield curve. Sadly, US politics seems more unpredictable than ever and uncertain traders may be best placed to sit this one out.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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