Talk From The Trenches: Midterms Sideshow Or Risk Event

By Bill Sokolis

US

The latest Talk From The Trenches will not be a discourse on which party or

particular candidate is a better choice, though many partisan swipes were

uttered in it's writing. 

Broadcast news channels are gradually working themselves into a lather ahead of

the November 6 midterm elections. The general consensus is that the GOP will

hold sway over the Senate by a narrow majority while Democrats will take control

of the House.

Natixis' Joseph Lavorgna puts "a 55% subjective probability on this outcome. The

second most likely scenario is that Republicans conserve a simple majority in

both chambers with a probability of 25%."

While traders may be asking themselves if it really matters, rate markets appear

to be taking it all in their stride, pricing in more tangible risk associated

with say tariffs and trade negotiations, the effects of a hard Brexit or the

Italian budget concerns injecting uncertainty. 

"A divided Congress should produce more uncertainty on trade, less chance of

additional fiscal stimulus and probably some political noise" Lavorgna posited,

"but without much consequences for the current economic dynamics."

JP Morgan researchers concur, stating "whether or not a chamber switches control

should not have a major influence on the business cycle. For this reason we

don't believe the midterms are a major event for US interest rate markets" nor

have they "been a first-order event for the dollar."

Nomura economic researchers, however, bring up an interesting scenario where

there is no "Blue Wave" and the Republicans retain control of the House and

Senate. 

"After President Trump's upset victory in 2016, 10yr UST yields jumped almost

80bp over a period of roughly one month, 25bp of which came within two days,"

Nomura notes, while "equities and the dollar reacted similarly, up roughly 4%

over a matter of days."

"A Republican upset on 6 November, with continued control of both the House and

Senate, may result in a market reaction in the same direction, although it seems

unlikely that the magnitude of the reactions would be the same."

Nomura does not view Democrats wresting control of the House as a positive for

the economy as a Democrat lead House "is unlikely to cooperate with either the

Trump Administration or a Republican controlled Senate on much beyond keeping

the government open."

Talk From the Trenches is a compendium of chatter from trading rooms, and is

offered as a gauge of the mood in the financial markets. It is not necessarily

hard, verified news.

--MNI Chicago Bureau; tel: +1 312-431-0089; email: bill.sokolis@marketnews.com

--MNI London Bureau; +44-203-865-3820; email: Ian.Stannard@marketnews.com