US Midterms: Status Quo Is The Biggest Market Risk

Heading into Tuesday's midterms election (MNI's Politics Team's full preview is here), the broad expectation is that the Republicans win at least one if not both chambers of Congress.

• From an asset class perspective, the impact of that is likely to be muted: there is 85- 90% chance implied by bookmakers of Democrats losing full control with Republicans gaining one or both houses.
• Furthermore, there is little discernable pattern on postmidterm asset moves: equities tend to rise in the aftermath of midterms no matter the result (though that is their natural long-term direction anyway); USD and Tsy returns are more mixed.
• In this regard though, the more interesting take from a risk-reward perspective is for a strong bearish Treasuries, bullish dollar move in the event the Democrats do the unlikely and win both the Senate and the House.
• That may seem counterintuitive given that it would simply reinforce the status quo. But a strong reaction would be expected because it would change the macro policy setup for 2023 in a more expansionary fiscal / tighter monetary direction than is overwhelmingly priced in.
• Full PDF Analysis below:

Midterms2022AssetImplications.pdf