The US mid-term elections have gone broadly as expected. The results mean another round of tax cuts are now unlikely. Rather we will probably see a return to “Gridlock in Washington“. The dollar’s period of strength may be coming to an end.
As expected, the Democrats have retaken the House of Representatives, the margin of victory – probably around 25 seats – being a bit larger than expected.
But the Republicans strengthened their hold on the Senate, gaining a net 2 seats from the Democrats. Given its significance in the Electoral College for the US Presidency, the Florida results are particularly interesting.
But the Republicans strengthened their hold on the Senate, gaining a net 2 seats from the Democrats. Given its significance in the Electoral College for the US Presidency, the Florida results are particularly interesting.
Once the split Congressional result – Democrats controlling the House, Republicans the Senate – became clear, markets quickly moved to discount the much reduced likelihood of a further package of tax cuts. Bonds rallied and the US dollar fell back a bit.
Recently, as Mrs.‘ Merkel’s control of events has faded, the US has compared favorably with Europe in terms of “strong leadership“. With a split-Congress this advantage looks much reduced. Major political initiatives are now unlikely, both in Europe and the US and, the days of a strong dollar look numbered, especially against the pound and the euro.
House Democrats are likely to initiate further investigations into President Trump’s tax affairs, the interplay between his policies and business interests and his connections with Russia.
Existing investigations will now have more political support. President Trump’s post-election decision to sack Attorney General Sessions, who had recused himself from the Mueller Russia investigation, should be considered in this light.
House Democrats will use their control of committees to hold hearings and summon witnesses, particularly in the fields of foreign and defense policy, the military and international intelligence. They will thus try to weaken the Trump Administration as much as they can.
The House is likely to promote a less friendly policy towards Saudi Arabia and a more aggressive approach to Russia. How far this will impact US foreign policy is uncertain.
With the Senate under Republican control, don’t expect an impeachment process to gain traction. Meanwhile, policy initiatives, of the sort likely to boost US economic prospects, will require compromise in Washington. Compromise may not be a “core skill“ of President Trump.
On the other hand, it’s not clear whom the electorate would most blame if we now have 2 years of relentless dirty fighting and policy gridlock.
A year-end rally still looks likely after these results.
Contact: Thomas Härter, CIO, Investment Office
Telephone: +41 58 680 60 44
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