The outcome of US midterm election results fell in line with the expectations. The outcome is poised to create significant changes for how the president can accomplish his domestic goals. Our focus will be on the policy decisions that could sway the economy, corporate decision-making and consumer spending. The president could face tough challenges to pursue more of his political agenda, including further tax reforms. The attempt to impeach the president is poised to gain momentum over the next two years.

On the protectionist global trade policies with even more import tariffs, it remains unclear. Both Democrats and Republicans support a tougher stance on Chinese trade and intellectual property practices. The president enjoys executive power and can set the terms regardless of whether Congress is divided or not. The Congress does not have much of an ability to control trade policy. So, it may not mean much for the US trade policies.

Although we feel the midterm elections is typically not a major event for both the US and global market, this time around we believe it could be different. Hence we looked at three different asset classes’ behaviour postmidterm election results i.e. global equities, the USD and bonds. On the equities, the US market may have factored in the outcome and hence it is unlikely to shake up the market significantly. The emerging markets will depend on the direction of the USD and trade policy tensions. Emerging market assets will likely respond inversely to movements in the USD after the elections.

With a divided Congress, we believe it will be negative for the USD. A dip in the USD due to reduced expectations of more pro-business policy moves by the president might also soften the case for further rate hikes by the US Fed. Much will depend on the potential incoming data. We expect the “risk-on” trading to be short-lived and will go back to closely analyse the trade war between the US and China situation, with more attention now when the president speaks on trade. On that note, we expect the ringgit may strengthen to around the 4.12–4.15 level in the near term. Our 2018 end target remains at 4.18–4.20.

With Democrats taking control of the House, further efforts to change the tax code might stall or slow down. That could mean that the federal deficit may not grow at a faster rate or require additional borrowing than is currently forecast. So, this could be mildly positive for bond prices. With a split government, it also means nothing will get done. Should the split government lead to a government shutdown as a negotiation tool, it could spur safe-haven bids for US Treasuries.

Source: AmInvest Research - 8 Nov 2018