I reckon that US president Trump might be in for a rude awakening after tomorrow. Or perhaps he is already aware of his current predicament, although I wouldn’t put it past him to refuse to accept that reality. Either way, he’s going to have to deal with the possibility that his grip on Congress could be slipping away.
As the US heads to the polls tomorrow, both the control of the House and Senate hang in the balance. And if the latest polls are anything to go by, Republicans have plenty of reasons to be nervous.
The national generic congressional ballot polls show Democrats holding a sizeable lead over Republicans as cost-of-living frustrations and dissatisfaction with Trump’s presidency have weighed on sentiment. Having said that, the national polling doesn’t necessarily translate neatly into congressional seats.
So, what does this mean for markets?
Let’s start with a bit of backdrop. Democrats need a net gain of three seats in the House and four in the Senate to wrest control of both chambers from Republicans.
If Republicans lose the House, then Trump’s legislative agenda could essentially run into a brick wall. As for Democrats, that would open the door to more investigations and tougher negotiations over government spending, taxation and funding.
But what if Democrats take both chambers? Well, that would certainly tighten the screws further especially when it comes to Trump’s judicial appointments and other nominations requiring Senate confirmation.
All that being said, let’s not jump the gun just yet. Even if we do get a blue sweep, there’s still a catch or two.
The Senate filibuster generally requires 60 votes to end debate on most legislation, even if Democrats secure a simple majority. Things like budget reconciliation might offer some exceptions, but it isn’t a free pass for everything. And Trump would still have his presidential veto, which requires a two-thirds majority in both chambers to override. In other words, winning Congress doesn’t automatically mean getting everything your way.
Now that we have that sorted, what is the best way to go about monitoring these developments?
Let’s run through a quick election night watchlist.
1. House results versus expectationsAre competitive Republican-held districts changing hands at a pace consistent with the polls, or is the national polling advantage not translating into seats? Keep a watchful eye on the likes of Pennsylvania, New York, California, Iowa, and Wisconsin, where even a handful of flips could reshape the balance of power.
2. Senate arithmeticRepublican-held seats in Maine, North Carolina, Ohio, and Texas will be among the important contests, with the likes of Alaska, Iowa, and Kansas also worth watching. Meanwhile, Democrats also need to defend seats such as Michigan.
3. Watch for prediction markets and repricing risksHow are the odds shifting for control over both chambers and are they moving substantially from pre-election levels? That will give a good reflection of overall sentiment and whether markets are responding to how things are moving when a certain outcome begins to take shape.
4. The dollar and Treasury yields responseKeep a watchful eye on how the dollar and the bond market play out, alongside Fed expectations, as traders begin to weigh the any potential impact on fiscal, inflation and/or growth implications. A reminder that if Trump loses his grip on the Senate, then confirming another Fed board member becomes much more complicated So, there’s that to consider.
5. Any immediate funding and policy signalsIn that regard, just be watchful of any language from congressional leaders about the funding deadline on 11 December, future tax legislation and the debt ceiling. The current Congress will still be responsible for the upcoming funding deadline, but the election outcome could influence how both parties approach those negotiations – especially with a potentially different balance of power coming in January.
We’ll dig into the individual battlegrounds in more detail later. But for now, this would be the watchlist I’ll be keeping in mind in trying to assess the risk of more political gridlock in Capitol Hill.
But the fact of the matter is that no matter who wins tomorrow, Washington’s fiscal headaches aren’t going anywhere.
This article was written by Justin Low at investinglive.com.