Everything you need to know about US midterm elections

Summary:

• The entire House of Representatives and 35 places in the Senate are to be replaced in the upcoming midterm elections

• Democrats hold a stable lead over Republicans, the Senate should be kept in the hands of the latter party though

• More tax cuts for the middle class promised by the GOP if it holds a majority in both chambers

• Elections will affect Donald Trump’s ability to pass bills through the Congress

• US dollar could be under pressure if Democrats take control over the House (govt shutdowns, investigations into Trump administration and the impeachment of him)

The US midterm elections will take place on November 6 and the consensus suggests that Republicans will lose a majority in the House of Representative while they will be able to keep an advantage in the Senate. If this scenario materializes the Congress will become more fragmented. In this article we outline how Democrats might affect US politics and what ramifications for financial markets we may experience thereafter.

Republicans hold a slim majority in the Senate and a bigger one in the House of Representatives. Source: Wikipedia, XTB Research

In the next month’s elections as much as 35 posts in the Senate and the entire House (435 places) could change. So far the Republican Party has been able to govern in both chambers albeit it may shift after the elections based on recent polls. The results offered by RealClear Politics suggest that the Congress will be divided between the two parties with Republicans losing power in the House. However, their majority in the Senate ought to be increased by a few seats. Looking at the chart below we may notice that Democrats’ lead over Republican has been quite steady and stable over recent months implying less uncertainty when Americans go to ballot boxes next week. Having said that, one cannot forget about a significant number of ‘toss ups’ as they affect how the House will ultimately look like. RealClearPolitics indicates that there are approximately 30 toss ups (as of October 30) - this number means that no one might be one certain which party will triumph next week.

Polls indicate that Democrats should be able to take power in the House of Representative ending a period of widespread rule of Republicans. Source: RealClearPolitics

Taking into account that the entire US Congress will be no longer governed by Republicans it is worth presenting a legislative process in a nutshell to understand why Republicans’ defeat in the House will matter. Any bill that is about to become a low needs to be presented by a Representative and then it is assigned to a committee for study. The most important phase is obviously voting - firstly in the House (a simple majority is sufficient) and then a bill goes to the Senate which is equipped with power to veto a bill. If it does so a bill returns to the House and here is the point - Republicans will not be able to pass any bills they pursue if they lose a majority in the House. What’s more, in case when a bill comes from a Republican’s Representative then it is likely that it will be scrapped already in the House implying that the Senate could not be able to even make amendments. Under these circumstances a role of Donald Trump will be marginalized. How could Democrats affect financial markets? Here is what might happen if they achieve a majority in the House:

• Democrats opt for more restrictive fiscal policy and they back up tax cuts only if there is money to finance them, not by a direct new bond issuance. Even as they are unlikely to be able to reverse fiscal changes implemented by Republicans thus far (a lack of majority in the Senate), they may make more tax cuts impossible seeing a debt ceiling in sight. If so, possible government shutdowns could become tougher to resolve.

• Having the Congress divided it could be harder to pass an infrastructure bill. This is the Trump’s plan to spend as much as $250 billion to invest in the US infrastructure.

• Countless investigations are likely to be conducted if Democrats gain power to do so. Note that during the first 20 months of Trump’s presidency Republicans turned down all 52 requests submitted by Democratic members regarding the administration’s conduct.

  • Corruption allegations - the Trump Organization rejected to disclose foreign government payers to his business as well as a way profits were calculated.

  • The 2016 presidential campaign - during the campaign Democrats accused Republicans of hiring foreigners without a proper disclosure as well as their contacts with Russia regarding a possible meddling in the elections then.

  • Flynn’s contacts with Russia - exactly a year ago Democrats sought information related to the former national security adviser Michael Flynn with regard to his contacts and business deals with some foreign governments including Saudi Arabia, Turkey and Russia.

  • James Comey Dismissal - the director of the Federal Bureau of Investigation (FBI) was dismissed by Donald Trump in May last year after he had been criticized for handling the two investigations: the Hillary Clinton email scandal as well as the Russian interference in the 2015 elections.

  • Trump’s tax returns - a winner in the House will be equipped with the explicit authority to compel the Internal Revenue Service to produce Trump’s tax returns.

  • Steven Mnuchin - there were some reports earlier this year that Treasury Secretary had racked up roughly $1 million in trips being funded by taxpayers instead of financing them from his own money.

  • The travel ban - the US president decided to enact a travel ban against some Muslim-majority countries.

  • Mar-a-Lago - shortly after Donald Trump was sworn in he headed to Mar-a-Lago, a resort in Florida, where a discussion of classified information was reportedly taking place.

  • Impeachment of Donald Trump - although it could be hard to achieve (the two-thirds support is necessary in the Senate to impeach the president) Democrats could take efforts to impeach the US president raising political uncertainty.

Possible investigations presented above are only several from an array Democrats could bring up when they win in the House. The fallout for financial markets appears to be clear - the more investigations, the more political chaos and thereby the more volatility in markets. Putting all the above-mentioned together one may suppose that a Democratic-led House could be US dollar and stock market negative. Nevertheless Republicans do not seem to be doomed to failure and there is still the likelihood they will keep a majority in the House given a relatively substantial number of toss ups (approximately 30 according to the data provided by RealClearPolitics).