Robeco: Democrat win in mid-term elections weakens Trump
Robeco: Democrat win in mid-term elections weakens Trump
A Democrat victory in US elections is positive for markets, though a return to fiscal discipline is unlikely, says Chief Economist Léon Cornelissen.
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 eight 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.”
Pressure on Fed
“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