Wall Street welcomes a possible Republican victory in the US legislative elections

The markets look favorably on the possible victory of the Republicans on November 8 in the American legislative elections and the scenario of a political blockage, even if some are worried about a possible crisis around the subject of the debt.

Struggling for months with a sharp rise in interest rates and the prospect of an economic slowdown, or even a recession, the New York market “already has a lot of concerns” and generally takes little interest in this election which nevertheless unleashes passions in the United States, according to Patrick O’Hare, of Briefing.com.

“The market thinks about it, but it is more concerned about the Federal Reserve and the turbulence in the United Kingdom,” adds David Kotok, of Cumberland Advisors, about an election deadline which will crystallize, for many American voters, a choice of society.

According to CFRA’s Sam Stovall, the most representative index of US stocks, the S&P 500, has risen consistently in the year since the 19 presidential midterm elections held since the end of World War II.

But the next 12 months could set a precedent, as analysts mostly see the New York Stock Exchange going lower before bouncing back once the economy enters a recession in 2023.

For several days, all the polls have given the Republicans the lead.

Winning back at least one of the two houses of Congress from the opposition would lead to cohabitation and “a gridlock in Washington, which tends not to be bad for markets, because it means the political status quo”, explains Carl Riccadonna, economist at BNP Paribas. “There would be no more major initiatives.”

“We spent a lot of money during this pandemic”, recalls Patrick O’Hare, for whom the operators would not be against a reduction in the budgetary wing.

In three years, the debt of the United States has swelled by 36%, or more than 8,000 billion dollars, under the effect of a series of plans to support the economy initiated under Donald Trump, then continued under Joe Biden. , to deal with the Covid-19 health crisis.

“We see tensions between monetary policy and fiscal policy in many countries,” said Jack Ablin of Cresset Capital, referring in particular to the historic hiccup that caused a major political crisis in the United Kingdom.

Several governments are thus taking it upon themselves to preserve the purchasing power of households by assuming part of the rise in the cost of energy, going against the trend of their central banks, which are seeking to curb inflation by tightening credit.

A hostile cohabitation “would mean that fiscal policy would be neutralized”, according to Jack Ablin.

– The return of the debt –

But the Republicans are hoping for more than paralysis. The leader of the Republicans in the House of Representatives, Kevin McCarthy, has already warned that his party would demand budget cuts if it regains control of Congress.

The Californian elected official even threatened to use the debt ceiling as a weapon to obtain concessions from President Joe Biden, who must systematically go through Congress to allow the government to meet its financial commitments.

“The Democrats could not raise the ceiling alone and the United States would default” on its debt, warns Ian Shepherdson of Pantheon Macroeconomics.

“The market does not take this risk into account,” warns David Kotok. However, “when you elect crazy people to the House of Representatives, you open the door to problems,” he said, mentioning in particular the far-right elected Marjorie Taylor Greene.

Sam Stovall tempers: “it depends on how they proceed, but reducing debt in an environment of rising rates is seen rather favorably”.

And for Maris Ogg, of Tower Bridge Advisors, “the only time politicians weigh on the market is when they do something that has an impact on company results, interest rates, or the dollar”. “But most of the time it’s just sound and fury, it has no weight.”

The dollar would be “dangerously weakened by maneuvers on the debt ceiling”, nevertheless warns David Kotok, not to mention that interest rates could rise even further with the risk of a default by the United States.

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