Special Report: U.S. Mid-Term Election Carnage Playbook

I think it may not be wrong to say that these elections would act as a vote of confidence for Mr Trump.

The U.S. mid-term election is the biggest political event of the year over in the United States. The victory result of this election would not only have an impact on the economic condition of the United States but also in several other countries around the globe. In my opinion, I feel it may not be wrong to say that these elections would act as a vote of confidence for Mr Trump. Americans will have a chance to have their say about Trump’s policies and show their support for the president. If we look through the lenses of promises that he made during his campaign, I think it is safe to say that most of his supporters are very pleased.

But let’s keep our focus on the markets and discuss the landscape for the markets on the back of these elections. Historically speaking, mid-term elections do not usually carry much weight and we have not seen any significant impact on the dollar price or the financial markets. What I mean by this is that there weren't any immediate significant moves in the market as the results were announced. Of course, over the course of  9 months or 12 months, the market would react to the mid-term election results. Looking back in the history (since 1922) the market average performance 9 months prior to the mid-term election was 0.3% and 12 months after it was 17.1%.  However, this year we are talking about Trump administration and given the amount of controversy we have around this government, these elections for the first time could bring some dramatic movement in the financial markets.

The U.S. economy is in a much stronger shape and this is a key reason that we have not seen much of the risk off trade kicking in. For instance, the dollar index has traded mostly lower against major pairs except against the Japenese Yen and Swiss Franck. Looking at other risk-averse assets such as VIX- the SPX volatility index has eased off from it’s highs of $25 to $19.86. The precious metal, gold is also trading near its 1,230 level from it’s previous high of $1,240. The Federal Reserve Bank over in the U.S hasn't shown any concern about the mid-term elections either. So, this strengthens the argument that the Fed has every plan to remain on the interest rate hike path.

In the absence of any important economic release, the majority focus remains on the U.S. mid-term elections. So the question is what to expect from this and how to play the results?

Accordingly, to the latest opinion calls, the Democrats could take control of the House and the Republicans would continue to control its majority in the Senate. However, the polls are nothing but indications and by learning from the past experience, one cannot rely on these opinion results either.

Nonetheless, one thing is pretty sure that the Republican-controlled Senate is good for the dollar bull rally purely because they support Trump's ideology. In other words, if the Republicans take the control of both governments, it would be highly positive for the dollar because this means that the Trump policies would control the U.S. In terms of number, the dollar-yen pair could easily touch the level of 114 and the euro-dollar pair could drop to 1.1350. Both numbers have significant importance because major support levels are there. Similarly, the equity market could continue to move higher and the bull momentum could easily push the indices like of S&P500 and Dow Jones to several new record highs.

If the Congress is split, Republicans controlling the Senate and Democrats in the house; this would simply mean gridlock for future Trump policies. President would never be able to see his policies becoming a reality - like a lower tax for the middle class along with several other controversial policies which he holds in the pipeline. However, the bearish momentum or the sentiment may not be able to last longer as the focus would shift towards the overall conditions of the economy which is strong. The worst-case scenario for Trump administration would be where Democrats control everything meaning the House and Senate. This would push the dollar index significantly lower and push the equity markets into the bear market territory.