Barack Obama defeated Republican Mitt Romney in Tuesday’s US presidential election, winning at least 303 electoral votes, with 270 needed for a second term. Apart from the White House election, also all the seats in the House of Representatives and a third of the Senate seats were elected yesterday. The results show Congress will remain divided: Republicans kept their majority in the House of Representatives, while the Democrats kept control of the Senate.
Bottom line:
The US election resulted in a status quo in both the White House and the Congress. The Congress will remain divided, with Republicans holding majority at the House of Representatives and thus continuing to limit President’s Obama room for maneuver.
With election uncertainty removed, market focus will now shift to the U.S. “fiscal cliff” - more than USD 600bn worth of automatic spending cuts and tax increases scheduled for January. Key for the markets will be the ability to reach a compromise between Republicans and Democrats. Any hardening of positions, suggesting the compromise could be difficult to reach, would weigh on market sentiment and might destroy the positive post-election stock market sentiment. Good news is that the relatively large margin of Obama’s victory means larger authority in negotiating a deal to avert the “fiscal cliff”. With such a clear mandate, it should be easier for Obama to be successful in these negotiations. Our baseline scenario is that most of the “fiscal cliff” is postponed for another year or two. In a less likely scenario of no compromise being reached, the “fiscal cliff” would result in the US falling back into recession next year, with severe negative implications for global growth.
The market reaction to the re-election of President Obama has seen Asian and European stocks higher, U.S. index futures paring losses, the dollar weakening against the euro and gold prices higher. This suggests that market reaction is mostly driven by expectations for US monetary policy to remain loose under Obama. Obama backs the Fed’s current monetary policy, while Romney has been critical of quantitative easing and said earlier he wouldn’t reappoint Ben Bernanke when the Fed Chairman’s term ends in January 2014. The end of US election is positive for stocks also as it reduces uncertainty that has weighed over the market in the last days.