Who will hold power?

• A tightly contested race for the US Senate as Democrats forecast to take the House
• Key issues for voters include the affordability crisis while markets worry about the impact on the AI trade, bond market volatility and dollar strength.
• Markets may be more affected by a delay in the final results

On Tuesday, 3 November, Americans return to the ballot box in what is likely to be the most consequential midterms for years. All 435 seats in the House of Representatives are up for grabs. Polls indicate, despite gerrymandering by both sides, that the Democrats are likely to take the House from the Republicans, who won 220 seats to the Democrats 215 back in 2024. The required majority is 218. The biggest uncertainty lies with the Senate, where 35 of the 100 seats are up for election. Of these 35 seats, 22 are being defended by the Republicans, with Democrats defending 13. The odds of a Democratic sweep of the House and Senate stood at 72%, according to prediction market Polymarket..

The Senate is now at risk for the Republicans as the US President’s popularity has continued to fall. US voters are frustrated by the “affordability crisis”; gasoline and overall fuel prices have surged since the US – Iran war began at the end of February. The promised end to high inflation endured under President Biden has not abated sufficiently for the average voter. In addition, voters are increasingly worried by what will happen with the development of AI data centres, how AI will affect job opportunities and how inflation will continue to hit the mortgage market and public spending at a time when the national debt is at a record-high $40 trillion.

In an attempt to shore up the vote and prevent a full sweep by the Democrats, President Trump has been on the road, holding events in Iowa and Kansas — two states that he won comfortably during his 2024 White House race — before returning to Washington, DC  ahead of Tuesday’s vote. Given that President Trump’s approval rating is, according to NBC polls, only at about 38%, this strategy of personal appearances by President Trump may backfire on the Republican party. 

However, in a sudden turn of events, House representative Haley Steven from Michigan, a Democrat, backed Republican candidate Mike Rogers for Senate, breaking with Democratic nominee Abdul El-Sayed. She had lost to El-Sayed in the August primary election and declined to campaign with him, demanding that he publicly disavow an outside group’s political ad that suggested a link between rising prices and US military support for Israel in its war in Gaza. This defection highlights the growing divisions within the Democratic party between the far left progressive and self-identified socialist wing and the more centrist voter. 

For investors this election may influence whether the AI bubble will pop and what repricing will look like in, as Dr Arnab Das, co-founder of Geologica Strategies (insert link to youtube video), describes it, a “more supply prone shock world.” Essentially markets will be looking to see how the potential shift in Congress will impact regulation, the bond market and the dollar. We may, as Dr Das describes, simply be returning to the “old ordinary”, when we go back from the “new normal”, with higher inflation and higher bond yields. Given rising global debt levels, increasing new bond issuance, sticky inflation, and still positive global growth, this return to the “old ordinary” seems most likely.

Realistically the bond markets will probably react less to whomever controls Congress and more to a shift in congressional control. The major question will be whether a divided government will deepend fiscal uncertainty. Regardless, no outcome gives Congress real control over President Trump. As noted by Arnab Das, tariffs and trade talks will still largely fall under the influence of President Trump. This means that, despite likely legal attempts to block new tariffs, President Trump will likely increase the number of executive orders and bypass Congress alltogether. 

One of the major concerns is around who will end up controlling the committees within Congresss. Regulation as it applies to energy policies, labour market policies, tech policies and even the budget for 2027 all will face different hurdles depending on the outcome of this election. The group that controls appropriations may be the strongest adversaries or supporters to the current White House administration. Whoever controls the fiscal purse controls the extent and duration of military operations and can influence immigration enforcement, another area of contention in this election. What is clear is that the Democrats, if they sweep both the House and Senate, are likely to pursue further legal challenges to the Trump administration and may seek impeachment against President Trump himself. 

In the end, much will depend on actual voter turnout. Voter turnout in midterm election years has historically lagged behind turnout in presidential election years. However, this year may prove different; with the US postal service putting a series of special measures in place to ensure that postal ballots are delivered on time tomorrow and therefore counted. This may prove critical as early voting has surged, with more than 54 million Americans already casting their ballots, according to an analysis by the University of Florida. 

The results of this midterm may move markets, at least modestly. However, it is not clear when will we really know the result and if all the parties will agree.The danger scenario may be a near-tie. If the Senate race is close, there will likely be certification challenges, protests and a not insignifcant risk of political violence.​​​​​​ That may prove to be the biggest market upset of all. 

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