global perspectives

no "blue wave" but gridlock arrives

no "blue wave" but gridlock arrives
Salman Ahmed, PhD - Chief Investment Strategist

Salman Ahmed, PhD

Chief Investment Strategist
Charles St-Arnaud - Senior Investment Strategist

Charles St-Arnaud

Senior Investment Strategist

It has been confirmed by the major US news outlets that the Democrats will take over control of the House of Representatives, while the Republicans will keep control of the Senate; a result that is very much in line with expectations. 

market implications.

So far the market reaction has been modest. As expected, the USD has depreciated, as it becomes clear we could have a serious gridlock in Congress for the next two years. We see some downside to US rates as the likelihood of further stimulus goes towards zero and a tendency towards a flatter curve. In equities, we may see sector specific effects (such as healthcare) but overall the impact is likely to be modest with other important factors in play coupled with a largely consensus result. 

We need to go back to 1986 to find a similar configuration of political power in the US: Republican President, Republican Senate and Democratic House. However, the results received so far suggest support for the Republican party may have been stronger than initially expected by pollsters. 

Taking a deeper look at the results, further polarization in US politics looks very likely. The geographical divide remains as Republicans consolidated their support in rural areas, while Democrats conserved support in cities and made gains in suburbs and fast growing areas. More importantly, many of the incumbents who failed re-election were moderate candidates closer to the center that have been replaced by more radical ones. This will likely lead to further division and confrontation in Congress, which could make compromises harder to reach. That may create political gridlock and the threat of a government shutdown during the next budget negotiation has increased significantly.

Democrats taking control of some key House Committees could mean more direct attacks on President Trump. However, despite the higher noise, we think the impeachment risk is close to zero as it would require support from two thirds of the Senate. However, the gains made by the Republicans in the Senate means the confirmation process for Presidential nominations will be easier. 

On geopolitics and the trade tension with China, the new composition of Congress changes little as both Republicans and Democrats have been critical of China. This will likely remain an Executive branch issue, although we may see delays to NAFTA 2.0.  Meanwhile, further tax cuts floated by President Trump in recent weeks appear out of the question (if anything we may see attempts to change some of the parameters). 

However, we could see potential common ground emerge in DC on infrastructure spending. Democrats have traditionally supported those efforts. That said, it is hard to see any Democrats supporting Trump so close to the next Presidential election, especially after the bruising confrontation during the Supreme Court nomination process. All in all, conditions would need to improve substantially from here for a compromise, which we view as unlikely.

important information.

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