In a major blow to US President Barack Obama, the Republicans have achieved the majority in the US Senate breaching the halfway mark by winning 52 seats. The Republicans now control Congress during President Obama's final two years in the White House.
Discussing the development and how this will impact the policy decisions in the US, Alastair Newton, Managing Director and Senior Political Analyst at Nomura International, said though the Republicans will have control of both houses, the party will not have a “super majority in the Senate” and that they will need Democrat support to push through legislations.
Newton rather expects more gridlock over domestic issues now. He feels the leadership of Republican Party is very keen to show the American electorate that it is competent to govern with an eye to the 2016 Presidential elections.
Below is the transcript of Alastair Newton's interview with CNBC-TV18's Menaka Doshi and Senthil Chengalvarayan.Menaka: Talk us through what you think the implications will be of this republican control over both houses?A: Let us be clear on one thing the Republicans will have control of both houses but they will not have a super majority in the senate. So, they will need Democrats support to push through nay legislation commensurate with their policy objectives.The optimists are nevertheless saying that what they hope to see is the President and Congress will work together and may be we will see a few contentious issues in the US resolved in the coming two years.I have to say that I am less optimistic. There is a lively faction in the Republican Party particularly on the right of the party which is very averse indeed to doing any deals with President Obama. So, I do think we are on balance likely to continue to see domestic gridlock in the US over many issues even though the leadership of the Republican party is very keen to show the American electorate that it is competent to govern with an eye to the 2016 presidential elections for which campaigning effectively begins tomorrow two years ahead of the election.So, that is the big picture. Obviously there are some detailed issues particularly of interest to markets both in domestic policy and overseas policy.Menaka: Let me start by putting a question to you specifically on the primary concern that impacts global markets and that is Fed policy. Of course the Fed is an independent institution but do you expect that a Republican majority, not super majority but majority could potentially influence or put more pressure on the Fed to withdraw from its easing policies earlier than anticipated at all?A: Certainly there will be and there are individuals in the Republican party who will wish to put pressure on the Fed. However I don’t think markets need to be particularly concerned about that. I think in the world of finance and budgets the two things which markers need to pay most attention to are the possibilities that a Republican dominated Congress may be able to water down some of the provisions in the Dodd–Frank legislation although I would expect Obama to resists that very strongly given that he sees it as one of his flagship achievements.Secondly let us keep in mind that at the end of March-April we are going to potentially run into another debt ceiling period and there may well be another deep partisan fight over increasing the debt ceiling similar to the one we saw around this time last year.I am not suggesting that America is going to default but you may recall that last year markets were completely hypnotised by debt ceiling shenanigans in Washington and a rampant and enthusiastic Republican right may wish to push that issue again.Menaka: Debt ceiling deadlocks we have not got a wee bit used to if I may say that from a global point of view. What specific policy making then do you think will be most impacted by this Republican majority? For instance energy policy or tax reforms, do you see big moves take place here, big enough to rattle global markets in any fashion?A: I still think tax reform is a very big call indeed. It is going to be very difficult to get agreement on that. I would put it down as a very small probability indeed. However I do think energy policy is potentially much more interesting. Obama put off consideration of the Keystone XL pipeline yet again at the request of democrat candidates in the run up to the mod term elections, that is clearly going to come back on the agenda. At the same time I expect the Republican leadership particularly Lisa Murkowski senator for Alaska who is expected to be the new chair of the Senate energy committee to press very hard on freeing up shackles which restrict American exports of hydrocarbons particularly gas. I think the President is going to come under significant pressure to speed up the licensing of LNG facilities and there will be a push in some sections of the Republican party at least till these restrictions on exports are proved. Given what we have seen in oil markets in the last three months or so over a period this clearly has a significant potential impact on energy prices worldwide and we will what happens over that. There will be resistance to this we should be in doubt about it including from the Democrat party and within the Republican party. This is one issue for markets to follow very closely in my view, it could go either way.
Menaka: But if does go the way of opening up exports of both LNG and crude that would underpin the weakness in the crude markets even further on from here?A: It would but let us keep in mind that this is not going to be something which happens between now and few weeks from now. It takes time to build the facilities. If the ban on exports of crude oil were lifted that could have quite a speedy impact though bearing in mind how American crude production has gone up by roundabout 3.94 million barrels a day over the last six years or so which is more than any OPEC member today produces other than Saudi Arabia. A lot of that is being turned into petroleum products and export of petroleum products. Export of crude would have a significant impact on global oil prices.Menaka: The republican position on immigration reform, a couple of bills that they have attempted to get through both houses in the recent past have rattled the Indian IT industry considerably. This is one area we will be watching very closely. Have you sort of any insight into what may take place now that they do have a majority?A: I am afraid this is going to be an issue which is going to remain deadlocked. I don’t see any significant prospect of serious movements on immigration. Now let us be clear on what we are talking about here. We are not really talking about immigration reform as such at all. What we have been talking about in Washington for the past many months has been some sort of amnesty for existing immigrants rather than a household reform of US immigration law. So anything which was done would in my view be pretty much at the margin a big issue about immigration in the US today.It may be that Obama decides that he wants to do something unilaterally. Over this we may see an executive order. Obama is going to remain largely focussed on domestic policy in any case. Executive orders are something which he has shown a propensity to resort to. Those will be resisted very strongly by a Republican majority.
Menaka: Essentially what you are indicating to us is don’t expect too much big change despite this taking control of both houses by the Republicans, expect more deadlock kind of politics and yet we have got the dollar zipping off today. So, if you take a look at the dollar index it has moved above 87 in trade today on the back of this news, early news coming in on some of the seat leads. So, curious to know how you think markets will respond to your analysis?A: Short term this is clearly a market positive. We already have momentum behind the dollar, have had momentum behind the dollar for some weeks now. I think the big announcement from Bank of Japan last week coupled with GPIF confirmation that it was going to be moving into S&P significantly has all been dollar positive.Our equity strategists are predicting a continuing S&P rally into the year end. The classic pattern in mid term elections in a presidential second term that thereafter it tends to be a good period for US equities.Let us keep in mind though S&P already at record highs, there are a lot of commentators out there who are concerned how long can this last and what the Fed does will clearly have some impact on sentiment of the US stock market valuations going forward too, however overall the news from Washington this morning is positive for market sentiment.
Senthil: You did touch upon Bank of Japan announcement of October 31. What other surprises do you expect from monetary policy going forward?A: I am not sure but I do expect many surprises. The situation in Europe with the ECB is very unclear. M personal view and I would stress that this is a personal view, there are number of views within our house of what the ECB is going to do, is if Mario Draghi is going to go to QE it will be as the last resort and probably not until at some point in 2015. I do expect him to do a little bit more with LTRO this week. However that would not be a surprise.In some respect the surprise for markets or at least some market participants would be that if the ECB does not go into a QE. Europe's economic performance is increasingly worrying, there is a lot of concern out there that Europe is becoming the new Japan so to speak.For emerging markets this is going to be quite a difficult time as the Fed\\'s tapering programme is now wrapped up and emerging markets which have better policy framework both in terms of what central banks are up to and what governments are up to I think will continue to perform well and in that respect India has got a very strong story to tell. As you know we at Nomura are big fans of the RBI. We recall very well that 14 months ago Dr Rajan turned around sentiment over rupee before we even got into regional election cycle in October-November-December and then of course the general election which saw a very positive result indeed. So, I do expect India to continue to do well despite the uncertainties globally over monetary policy going forward.
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