🏵️The midterm election results are becoming clear, with the Democratic Party sweeping the board. According to betting site Kalshi's predictions, the Democrats will secure 259 seats in the House of Representatives (with 218 for a majority) and 56 seats in the Senate (with 50 for a majority) Image 1 Image 2

The advantage gained by the Democrats far exceeds expectations, especially with some deep red states like Texas turning blue, which is quite surprising. The prolonged situation in Iran and rising inflation have made many voters lose patience, leading to a significant drop in Trump's support rate before the midterm elections, with inflation being the lowest concern Image 3

This result has triggered market concerns about the obstruction of Trump’s policies, increased political gamesmanship, and intensified regulation of AI and cryptocurrency. Nasdaq futures fell by as much as 2%, with both cryptocurrency and the dollar weakening, but then rebounded.

🏵️Market worries are not unfounded. However, it is also important to understand that the distribution of power in both chambers of Congress and the presidential veto power means there is still "considerable distance" from sentiment to policy implementation.

The power of the two chambers of Congress has its own focus; simply put, the House of Representatives "handles money" (budget, taxes), while the Senate "handles people" (nominations confirmations). In terms of foreign affairs and trade, Congress has limited influence.

However, the Senate has a "special power" known as "filibuster," meaning that even controlling a simple majority makes progress difficult. Otherwise, why are we yet to pass the 2027 fiscal year budget? Controlling 60 seats can end "filibuster," so 60 votes are a significant "watershed." Moreover, the president also has a "veto power."

🏵️Combining the midterm results, there are a few relatively clear points:

1) Trump and his supporters may face investigative pressure. After the 2019 midterms, the Democrats pushed to impeach Trump, although it was merely symbolic (requiring a 2/3 absolute majority in the Senate).

2) Fiscal games will intensify. Forget about the 2027 budget and Trump’s spending directions; military actions will be affected; but places where Democrats want to spend money will also be vetoed Image 4

In the games, government shutdowns will increase (but have no substantial impact), and the risk of hitting the debt ceiling will also rise (estimated to touch in the second quarter of 2027), but the debt ceiling is too important for anyone to bear the responsibility of default, so it is highly likely to be "dangerous without real risk" Image 5

3) Regulation of AI and cryptocurrencies primarily depends on local levels; federal legislation is very challenging Image 6 Image 7

🏵️Therefore, political games are increasing (emotionally risk-averse); fiscal expansion is difficult (beneficial for U.S. Treasuries), shutdown and default pressures (detrimental to U.S. Treasuries and the dollar); personnel appointments are hindered (beneficial for the Federal Reserve); AI and cryptocurrency regulations (direction clear but progress uncertain). It is not hard to see that the same asset is affected in different directions, and the short-term and medium-term impacts also differ.

But ultimately, the essence of the impact on the dollar, U.S. Treasuries, and U.S. stocks depends on: Is it a correction of existing errors (inflation, Iran, the Federal Reserve, tariffs) or unnecessary “trouble” for the sake of opposition (AI, finance)?

We tend to believe that the short term is the former, which is also why most U.S. stocks rose after the midterms Image 8. However, the risks of the latter will increase, as the closer we get to the 2028 election, the more intense the games will become. If this is indeed the case, we will have to rely on major breakthroughs in AI or interest rate cuts by the Federal Reserve to hedge.

The same applies to other markets; whether it will be short-term without distraction or take risks in the foreign and trade areas, which are still manageable later on, can result in vastly different outcomes.

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