Wednesday, November 9, 2022

Why the risk-off tone? Isn't divided government bullish?

Mid-week market update: Why have the markets gone risk-off? Isn't divided government supposed to be equity bullish?

While the exact results of the mid-term elections aren't known just yet, polling models and PredictIt odds, which represent consensus expectations, show a narrow Republican majority in the House and a probable Democrat control of the Senate.

This result should be equity positive for several reasons:
  • A tighter fiscal policy which makes the Fed's job easier and raises the odds of a more dovish path for monetary policy.
  • A narrow Republican majority reduces the tail risk of a disorderly debt ceiling impasse. The recent UK experience showed that the market has little patience for fiscal uncertainty.
While the political overtones of the election are mildly bullish, I can think of some other reasons for the risk-off tone in the markets.

The full post can be found here.

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