5 October 2018
US mid-term elections: Feeling Blue?

The mid-term elections are less than a week away and opinion polls continue to suggest the Republicans are under pressure. The loss of Congressional control would make life increasingly difficult for President Trump and have major implications for policy. Here we revisit the possible election scenarios and assess their market implications

Setting the scene

The 6 November mid-term election offers the electorate the opportunity to give their assessment on the first two years of Donald Trump’s presidency. Does the “Make America Great Again” policy thrust continue to resonate to the same degree, have legal issues taken their toll, or is it still all down to “the economy, stupid”? The outcome will have major ramifications for economic and trade policy, which will set the battleground for the 2020 presidential election.

Currently, the Republicans hold the Presidency and majorities in both the House of Representatives and the Senate, but Democrats will be looking to break this stranglehold. All 435 House of Representative seats are up for grabs along with 35 of the 100 Senate seats[1].

The Republicans hold 235 seats in the House of Representatives versus the Democrats’ 193 while there are seven vacant positions. This means the Democrats need to make a net gain of 25 seats to wrestle control of the House from the Republicans

In the Senate, the Republicans have a wafer-thin majority. They currently hold 51 of the 100 seats (plus the Vice President’s vote if needed in a tied vote) while the Democrats have 47 and there are two independents, who vote with the Democrats. However, of the 35 seats being contested in November, the Democrats have 24 up for election along with the two independents, while the Republicans only have nine. As such, the Democrats need to win two of the nine Republican-controlled Senate seats, while holding on to all of the seats they currently occupy to gain control of the Senate.

National polls have remained broadly stable over the last month or so, showing Democrats ahead by 8-9%, though President Trump's approval rating has improved slightly (but his net approval remains negative). This points to a solid but not insurmountable advantage for Democrats in the House race, while Republicans remain favoured in the Senate thanks to the advantageous map.

Betting odds and polling analysts continue to believe the most likely outcome is that the Democrats will win control of the House of Representatives, but fall short in their quest for the Senate. The odds of a Democratic Senate majority have lengthened materially, with no more than a 10-15% probability now ascribed to that outcome. Democrats would need to win every close race in the Senate to make it to 51 seats (or perhaps score a surprise win in Texas or Tenessee).  

Betting odds and polling analysts believe the most likely outcome is that the Democrats will win control of the House of Representatives, but fall short in their quest for the Senate

Still, even if the most likely outcome is a Democratic House and a Republican Senate, there is a fairly large chance of a surprise outcome. That's because there is virtually no chance of a Democratic Senate and a Republican House, so the probability of the two less likely outcomes (Democrats win the Senate, or Republicans hold the House) are cumulative. That means there is a 30-40% chance of a different outcome from the central expectation. To the extent that markets are expecting a Democratic House/Republican Senate, there may be scope for a sudden adjustment on the morning of November 7th if there is a different outcome.

Odds of Democratic control of Congress after 2018 Mid-terms

(Figures as of 1 November in BOLD, and as of 26 September IN BRACKETS)                

 

FiveThirtyEight

PaddyPower

PredictIt

House of Representatives

85%

(80%)

4/9 ~69%

(4/11 ~64%)

70%

(66%)

Senate

15%

(31%)

12/1~ 8%

5/1 (~17%)

12%

(31%)

[1] Members of the House of Representatives serve two-year terms whereas the President has a four-year term and a Senator has a six-year term. Senators terms are staggered so one-third of the 100-member Senate are up for re-election every two years. This year there are 33 Senate seats being voted on in regular elections with two additional special elections due to Senators resigning before their term ended.

Robo-advice: A revolution with risks

Are the machines really taking over? In the world of financial planning, they've been quietly replacing humans for the past 10 years. And while experts say the revolution has brought many positive changes to the industry, there are risks as well, writes Jeremy Gaunt

Risks and benefits

Using machines to give financial advice can make investing and other financial decisions cheaper, turn swathes of left-out consumers into new savers and investors and remove human bias in deciding where and when assets should be bought or sold.

But so-called robo-advisors also bring new risks, ranging from technological glitches to making mistakes by misinterpreting what a consumer or investor really want and, perhaps more importantly, need.

This was the message from US and European experts brought together to discuss the rise of machines using algorithms rather than humans to give advice on investment decisions and other relevant choices related to retirement, pensions, mortgages and debt management. It is a fast-growing trend that is bound to increase in size and scope as automation swallows up a broad range of human activity.

India’s central bank leaves rupee on the path to free fall

By keeping the policy on hold, it seems the central bank of India has dumped the rupee, which leaves the ball in the government’s court for more substantial currency stabilisation measures. We just revised our year-end USD/INR forecast to 75.0 from 73.5, though now it seems, maybe it wasn't enough 

RBI surprises by keeping rates unchanged

The Reserve Bank of India’s monetary policy committee voted 5-1 to keep the repurchase and reverse repurchase rates unchanged at 6.50% and 6.25% respectively at today’s meeting. One dissenter vote was in favour of a 25bp rate hike. Even as most MPC members voted to change the stance to a calibrated tightening, there was an evident lack of action on their part despite time running out to stop the rupee's worst fall in last five years.

The decision was surprising for us and many others as only nine out of 49 participants in the Bloomberg poll had predicted no change, which seemed to be impacted by domestic liquidity concerns rather than currency weakness, even as a depreciating rupee remains a constant threat to the RBI’s inflation target. We thought the RBI would give some thought to supporting the rupee in a pre-emptive move to curb future inflationary pressures, however, in the end, we and many others were wrong.

The stable policy might be consistent with inflation within the policy target of 2-6%, however, as we have noted earlier this is more of a transitory low inflation phase rather than an ever-lasting trend. And we don’t have to wait for too long to see the recent dip in inflation being reversed. We anticipate a bounce back in inflation above the 4% mid-point of the policy target next Friday, thanks to the double whammy of rising oil prices and the weak currency.

After a moderate slippage in July and August, oil has caught up with the steady upward momentum, and this will eventually come through in domestic fuel prices. Even the move earlier this week to cut retail fuel prices ( 1 rupee per litter) appears too small to make an impact on overall inflation, let alone satisfy consumer or the markets.

The China-US trade war is hurting the Taiwan dollar

The ongoing trade war between the US and China has led to a sell-off in the equities market by foreign investors weakening the Taiwan dollar. The inflation release today won't lead to a central bank hike, but combining the two factors means the currency is likely to weaken further to 31.0 by the end of the year

Trade war woes

Taiwan's exports grew at a mere 1.9% year on year, and electronic parts were even slower at 1.3% - and this could potentially be a direct result of the supply chain damage caused by the bilateral trade war between the US and China. This has led to a sell of equities (as Taiwan's stock market has fallen by 4.84% since 1 October) by foreign investors and pushed the Taiwan dollar against the USD weaker by 0.96% since the end of September 2018 (Spot 30.835).

Brexit blog: Finally, a fudge?

Reports suggest UK Prime Minister Theresa May is inching towards a compromise on the Irish border issue, which could help break the deadlock in Brexit negotiations. But will it fly with the DUP and Conservative Brexiteers, or even the EU?

Headlines suggest possible UK compromise on Irish backstop

Away from the noise of the Conservative Party Conference, the big story of the week is that Theresa May could be gearing up to propose a compromise with Europe on the contentious Irish border issue. So what does this mean in practice, and crucially, will it be enough to convince UK lawmakers?

US Mid-terms: What could swing it?

In our mid-term preview note, we set out the potential scenarios for the post-election period and outlined what we thought the likely market reaction would be. In this second note, we look at the current standings and what could yet influence the result

Current state of play

The Republicans hold the Presidency and majorities in both the House of Representatives and the Senate, but Democrats will be looking to break this stranglehold at the 6 November mid-term elections. All 435 House of Representative seats are up for grabs along with 35 of the 100 Senate seats[1]

By gaining control of either the House or the Senate (or both), the Democrats would have the ability to severely restrict President Trump’s policy agenda while increasing the possibility of impeachment proceedings being initiated against the president. However, if the Republicans retain control of Congress, this could inject a new impetus into President Trump’s legislative plans with more fiscal stimulus, more protectionism and potentially an even more belligerent approach to politics both at home and abroad as we've detailed here previously.  

In the House of Representatives, the Republicans have a majority of 24, holding 237 seats versus the Democrat’s 193 seats with five vacancies. As such, the Democrats need to make a net gain of 25 seats to win control of the House. In the Senate, it is closer with the Republicans holding a majority of just 51-49 in the 100 seat chamber – although they can rely on the Vice President’s deciding vote in the event of a tie. 

However, of the 35 seats being contested in November, the Democrats have 24 up for election along with the two independents, while the Republicans only have nine seats. As such, the Democrats need to win two of the nine Republican-controlled Senate seats, while holding on to all of the seats they currently occupy to gain control of the Senate.

[1] Members of the House of Representatives serve two-year terms where-as the President has a four-year term and a Senator has a six-year term. Senators terms are staggered so one-third of the 100-member Senate are up for re-election every two years. This year there are 33 Senate seats being voted on in regular elections with two an additional two special elections due to Senators resigning before their term ended.

Canada: The return of Nafta

Nafta is back - and it even has a new name. On the back of this we saw positive CAD news - lifted 0.5%, after one of the many, and most important, deadlines was finally reached to finalise ‘USMCA’; a big sigh of relief for the Canadian economy. But has the negotiating process done any damage?

A new Nafta deal, or should we say United-States-Mexico-Canada-Agreement (USMCA), was agreed by the US and Canada in the late hours of Sunday, 30 September. The deadline was met with a few hours to spare, enabling Mexican President, Enrique Pena Nieto, and his Congress enough time to sign off on the new trade deal before the new Mexican President takes over at the beginning of December.

The US Congress will have until 30 December to review and sign the deal, but, still pivotal for the new trilateral agreement to be effective is the Congressional vote of approval on legislation underpinning the deal, which won’t take place until next year, post-mid-term elections. The latter seems likely that the Democrats will take control of Congress, and although chances of approval have been heightened, given Canada has been included in USMCA, there’s no guarantee; an assessment of the new terms of trade still needs to be completed, which may prove an obstacle for Trump administration.

Crude oil: Iranian flows spook the market

Falling Iranian exports have been the key driver for crude oil prices, whilst the lack of action from OPEC to counter falling Iranian supply has only added to the bullish sentiment. As a result of this, we expect prices to remain well supported for the rest of the year and have raised our 4Q18 Brent forecast. Demand risks will likely play out more over 2019

Where next for prices?

Oil prices are likely to remain well supported for the remainder of this year, the market is set to be in deficit over 4Q18, while Iranian exports have fallen more than expected. There is also the uncertainty over whether OPEC has the capability to make up for any shortfalls in the short term. We struggle to identify a catalyst that would put significant downward pressure on the market in the short term, and as a result, we have revised higher our 4Q18 Brent forecast from $75 per barrel to $85 per barrel. However, we still foresee weaker prices moving into 2019, with downside risks to oil demand growth, driven by the ongoing trade war, and the current strength in oil prices coupled with emerging market currency weakness.  

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In case you missed it: Finding the silver lining

With under five weeks to go until the US mid-term elections and the Republicans under pressure, will President Trump double down on his protectionist stance? Europe is battling its own problems too, with the Italian budget saga and “no-deal” Brexit noise growing. Emerging market currencies are also feeling the pain as the rupee and Taiwan dollar take a hit              

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