Trader: "The Midterms Do Matter, Just Not For Markets"

By Mark Cudmore, former Lehman trader and macro commentator

Whatever the results, the U.S. midterm elections aren’t going to significantly alter the underlying markets landscape.

This column has no interest in downplaying the emotional/social aspects behind Tuesday’s ballot and they can matter for assets at the margin but any expectations of a direct impact on markets-relevant policies as a consequence of the elections are likely misplaced.

Financial assets will react but moves are unlikely to be contingent on who wins what. Whatever transpires, an uncertainty premium will soon be lifted and that will support risk assets in the weeks ahead as underinvested money managers return to the fray.

Crucially, don’t expect a game-changer for trade policy since that falls under the White House’s purview and a hard line on China has bipartisan support anyway. A win for the Democrats may seem like a vote against Trump’s approach, but historically they were the party that was more pro-tariffs. Trump may or may not be changing his tune on trade, but the results won’t immediately clarify which way he’ll turn next.

Some argue that a Democratic win will make Trump more entrenched and belligerent on China, others that a Republican win will have the same effect. The core point is that we don’t know and it doesn’t really matter -- Trump will do what he wants on trade.

A Republican landslide will bolster Trump’s presidential influence but it’s hard to hold conviction on exactly what that will mean for policy and private sector confidence beyond an initial investor boost.

Further fiscal stimulus may prove difficult to pass through Congress, whatever its makeup, while an anti- immigration and isolationist foreign policy are nuanced topics when it comes to financial market impact.

For tail risk outcomes, such as a move to impeach if the Democrats win both houses, they are just that -- tail risks which are unlikely to be in play. Whether Mueller and his probe gets shut down won’t be decided by these elections, and any impact on markets should that occur is also unclear.

Most likely markets will do what they tend to do already -- and that’s trade off the economy, stupid. And as this column outlined last week, that’s a macro environment that’s looking relatively constructive for risk assets even if volatility is likely to remain elevated.