A Democrat victory in US elections is positive for markets, though a return to fiscal discipline is unlikely, says Chief Economist Léon Cornelissen.
The Democrats won control of the House of Representatives in the Congressional elections of 6 November, but failed to win the Senate. Mid-term elections, coming in the middle of Trump’s first term in office, are usually seen as a referendum on the sitting president.
Controlling the House means the Democrats can block any initiatives from Trump’s Republican party, which had held both chambers of Congress for the past four years. It therefore counters the president’s power, though populist issues such as the trade war with China and more tax cuts are set to continue, Cornelissen says.
“More fiscal stimulus is likely, as it isn’t in the interests of Democrats to turn into champions of fiscal discipline,” he says. “There are some that say Democrats will turn down any initiative from Trump, but they do have a lot of common ground on issues such as tax cuts for the middle class, and the need to rebuild American infrastructure.”
“However, given that the 10-year Treasury yield is down 5 basis points, the market is pricing in the fact that the chance of another big package of fiscal stimulus has come down. This also fits with equity futures being unchanged, since fiscal policies now focus on consumers rather than companies.”
“So, fiscal policy will remain loose, putting more pressure on the Fed, which will probably continue to increase interest rates but at a moderate pace. The broader trends of suspicion of China and rising protectionism won’t change. Economically, the low-intensity trade war with China will probably continue, as the anti-China card is also popular with the Democrats. Nevertheless, it isn’t in the interests of the US to play this too hard.”
“Trump suggested a milder approach before the elections, though this was probably only meant to influence market sentiment. The Democrats will also opt for a softer tone, though a quick de-escalation seems unlikely. And China won’t materially change its growth strategy, so it’s difficult to see what will happen; some kind of ‘play-it-safe’ mode could emerge all round.”
Meanwhile, Trump and his party are currently under investigation by a special counsel led by former FBI director Robert Mueller over alleged collusion with Russia in the 2016 presidential election. The president is also under pressure to release his tax returns from when he headed the Trump real estate group before his election.
“The victory of the Democrats wasn’t overwhelming, but it does put a check on Trump’s US nationalism and more extreme plans, and his attempts to dismantle international institutions and accords will be hindered,” Cornelissen says. “This is positive for markets as it creates more visibility.”
“Democrats will now increase the pressure on Trump because the House will push to publish his tax returns and conduct their own investigation on any Russian interference with the 2016 presidential elections. What is more important is whatever Mueller comes up with.”
“The hand of Trump has weakened. But any impeachment is far off, and it’s not certain that the Democrats will in any case start impeachment proceedings, because it is likely to fail in the Senate where they would need a two-thirds majority. So it could also be that they refrain from this because it’s a useless battle.”
“Meanwhile, the presidential elections in 2020 cannot now be considered a shoo-in for Trump. In a broader sense, there is still worry that the whole Trump phenomenon will change the global order structurally, as seen with the other populist victories in Italy and Brazil. It has though curtailed it within the US, so that’s a good thing.”
The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.
The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.
Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is ACOLIN Fund Services AG, Affolternstrasse 56, 8050 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.
Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/RobecoSAM AG product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/RobecoSAM AG offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.
This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.