CITIC SEC: Can the pressure from the midterm elections still trigger a "TACO"?

CITIC SEC released a research report indicating that with the midterm election process halfway through, the main strategic games of both parties are gradually becoming clear. An analysis by state shows that the most likely outcome is the Democrats securing the House of Representatives while the Republicans maintain control of the Senate. A divided Congress would increase governance friction for Trump, but as long as the Republicans retain the Senate, pressure on issues such as the Supreme Court, impeachment investigations, and election disputes would be limited. The constraints of the midterms on Trump's "TACO" might be weaker than the market previously expected, thus it is advisable to monitor changes in financial conditions and asset prices more closely. The key points from CITIC SEC are as follows: With the primaries for the midterm elections halfway through, polls in various states are starting to become indicative, and the main strategic games of both parties are gradually clarifying. Relying solely on the midterms to explain the "TACO" logic is no longer sufficient. The market typically views the midterm elections as a core source of political pressure on Trump, but general discussions on the matter are inaccurate; specific analysis is still needed from the perspectives of key state races and the pathways to control for both parties. As both parties' major candidates gradually become clear, polls in various states are starting to deliver significant insights, and their main strategic tactics are becoming more defined. The Republicans continue to focus on border control, public safety, and the perceived threats to traditional values, while the success of progressives like El-Sayed provides a target for them to portray the Democrats as "radical leftists." The Democrats, on the other hand, are concentrating their attacks on issues such as cost of living, tariffs, healthcare benefits, war, and the expansion of executive power. Trump's endorsement remains effective in the Republican primaries, but its primary role is to consolidate internal party support, rather than directly guaranteeing victory in the general election. The most likely outcome is that the Democrats will secure the House of Representatives while the Republicans maintain control of the Senate. In terms of the House of Representatives, the Republicans might gain a buffer of about six seats through redistricting; however, with a thin majority, it would still be difficult to completely offset the pressures of seat losses and subpar national polling for the governing party during the midterms. In contrast, the election map currently favors the Republicans in the Senate, where they hold 53 seats compared to the Democrats' 47 seats. Since the Republican Vice President can cast a tiebreaking vote in a 50-50 scenario, the Democrats must gain a net of four seats to reach 51. Specifically, states like Georgia, New Hampshire, and North Carolina currently favor the Democrats, with candidates such as Ossoff, Pappas, and Cooper building leads primarily through their personal images, fundraising abilities, and appeal to moderate voters. Michigan and Maine appear more evenly matched, while Iowa, Ohio, Alaska, and Texas remain constrained by the Republican base, historical voting traditions, and the Democrats' cross-party mobilization capabilities. The Democrats not only need to avoid losing their own seats but also need to win at least seven out of nine battleground states, making their path to victory significantly narrower than that of the Republicans. A divided Congress would increase governance friction for Trump, but it is unlikely to create fundamental constraints. In a scenario where the Democrats secure the House and Republicans maintain the Senate, the Democratic-controlled House could initiate investigations, subpoenas, and impeachment proceedings while also blocking new large-scale partisan legislation. However, passing impeachment in the Senate would still require a two-thirds majority. If the Republicans retain the Senate, they could push through nominations of government officials and Supreme Court justices with a simple majority. In terms of financial regulation, deeper adjustments needing legislative action from Congress will become more challenging to achieve, but adjustments in banking regulation, enforcement standards, and administrative rules primarily occur within the executive branch and regulatory agencies. Thus, a short-term deregulatory shift may not necessarily reverse. Regarding fiscal policy, both parties in Congress might find it easier to get stuck over budget and debt ceiling issues, raising risks of government shutdowns, debt ceiling negotiations, and policy fluctuations. However, compromises may be achievable through mutual inclusion of spending demands. For the market, the constraints of the midterms on Trump's "TACO" might be weaker than the market previously expected, so it is advisable to observe changes in financial conditions and asset prices more closely. In contrast to the Democrats controlling both chambers, a divided Congress will likely intensify political maneuvering around investigations, budget approval, and policy implementation. However, as long as the Republicans maintain control of the Senate, extreme scenarios such as blocked impeachment convictions and judicial appointments become less likely, and competition between the two parties would increasingly focus on the 2028 elections, keeping overall political risk within manageable bounds. At the same time, the constraints of the midterms on Trumps "TACO" may be weaker than previously expected by the market. Election pressures do not necessarily compel him to concede on issues such as tariffs and war. Therefore, when assessing whether Trump will adjust his policies under pressure, it is advisable to focus more on changes in financial conditions and asset prices, and to moderate attention to fluctuations in election predictions from platforms like Polymarket. Risk factors include unexpected deterioration of geopolitical conditions, unexpected changes in the U.S. economic situation, and uncertainties surrounding the election.