A bruising fight over raising the debt ceiling is expected
Investors are expecting Republican gains in U.S. midterm elections, a result that will likely temper Democratic spending and regulation but set up a bruising fight over raising the U.S. debt ceiling next year.
While macroeconomic concerns and Federal Reserve monetary policy have been the dominant forces behind market moves this year, Capitol Hill politics could exert influence on asset prices. Historically, stocks have tended to do better under a split government when a Democrat is in the White House, with investors attributing some of that performance to political gridlock that prevents major policy changes.
Still, a split government could lead to heightened tensions over raising the federal debt ceiling in 2023, setting up the kind of protracted battle that led Standard & Poor’s to downgrade the U.S. credit rating for the first time in 2011, sending financial markets reeling. Conversely, a Democrat surprise could mean a stronger dollar and higher yields as possible fiscal expansion could require more rate increases, analysts at Morgan Stanley said.
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