Should Democrats win, expect a relief rally - Westpac

Analysts at Westpac suggested that a divided US government is often considered a “good thing” for markets.

Key Quotes:

"Gridlock ensures that policy shifts are incremental and limits overreach and thus the risk of potentially damaging policies for the economy and markets.

A Clinton presidency combined with continued Republican control of Congress – still the most likely outcome – appears to be very risk friendly but it's not that simple. Under the most likely scenario of a reduced House Republican majority, Leader Paul Ryan would more than ever be forced to rely on Democrats to pass legislation. Ryan will be leading a highly fractured Republican party, divided between pro-Trump and anti-Trump forces. Ryan’s predecessor Boehner faced similar challenges (Tea party vs moderates) and the House proved almost ungovernable.

Overall a clean sweep for the Democrats likely still produces a small relief rally but it is likely truncated by concerns that it may not be business friendly. Much depends on the size of the majority and longer term it may if anything be a net plus for risk assets to the extent it becomes easier for Clinton to enact fiscal stimulus/infrastructure spending.

Continued divided government (a Clinton presidency and a Republican led congress) is for many the best case scenario. But, the caution is that the Republican party will be highly fractured and the House may be ungovernable, leading to policy paralysis and the return of confrontational politics that led to the US government shutting down and risking default."