Sweet dreams for GOP & nightmares for Dems, but....
From a markets point of view the outcome of the midterm elections is moderately encouraging now that we have a president who is generally more pro-market and pro-business than his democratic caucus and a party in charge of both houses of Congress which is also generally pro-business. If they manage to get into a room and work some deals out, we could be witness to progress in some important policy areas:
• Energy: it will now be easier to open up the energy markets for exports of oil and gas. Moreover, Obama could be tempted to finally approve the Keystone pipeline from Canada to the US. These prospects could push oil prices further down.
• Trade: Obama would like to close major free trade deals with Europe and the Pacific region (TTIP and TPP). But to do this, the President needs fast-track authority otherwise Congress could hold up the legislation by constantly adding amendments. A Republican controlled Congress could more easily grant Obama this authority. Most economists agree that TTIP and TPP would give a big boost to the world economy.
• Bank legislation: Republicans despise the Dodd-Frank legislation that put the financial sector in chains according to many conservatives. Even some Democrats are not too happy with this bank law. So we could see some relaxing of the constraints on banks in the coming years.
• Taxes: there's an opportunity for the corporate income tax to be reformed. US companies have by now stashed as much as $5tn in cash abroad in order to prevent having to pay one of the highest corporate taxes in the world. If Washington succeeds in pushing through some changes in tax law, part of this money could come back to the US ready to be invested instead of idly waiting abroad thereby giving the US economy a boost.
• Immigration: we admit, it will be very difficult to realize progress on this issue, but if Obama and Congress can work something out it will be a lift for the US economy as well as for the global economy.
• Battle against the Islamic State: Republicans are more in favor of a "boots on the ground" component in the strategy to battle the Islamic extremists. If they succeed in adding this to the mix, the prospects for success against IS will likely increase, somewhat lessening the geopolitical risk in financial markets prices.
Foreign Policy Troubles?
The elections may turn out to be good for the above foreign policy issue, but could have averse consequences for two other areas:
• Iran: the GOP prefers a much harder line against Iran. So the outcome of the midterms could frustrate the Iranian nuclear talks.
• Guantanamo Bay: the Gitmo prison has turned out to be a major catalyst for increased extremism in the Middle East and in other places. Obama wants to close it down, but he was confronted with major opposition in Congress, especially from the Republican side. Now, we see increased chances of Gitmo continuing to operate even after Obama leaves office. Adding some more fuel to extremist, anti-American fires around the world.
Bipartisanship pipe-dream or realistic scenario?
All in all, we see some probabilities for market-friendly breakthroughs as a result of the midterms. However, financial markets should not get their hopes up too much. Republicans could get cocky because of their success and populist firebrands like Marc Rubio still are a sizeable part of Congress despite the moderate conservatives making a comeback. Democrats should be some what humble after this massacre, but they could opt for thinking that in 2016 the electoral map is heavily in their favor and therefore be less amenable to working with Republicans.
There won't be an end to political gridlock yet, there's just a movement of the chokepoint from the Senate to Obama's veto. People were very frustrated that nothing got done in Washington the last couple of years, but they should not count on DC becoming a smooth, tough, lean and mean operator just because of one election. Some market friendly decisions now have a better chance of being taken, but politics in general in America will not begin to work better overnight.