Which way for markets? It's all about the midterms

Aaron P. Bernstein | Bloomberg | Getty Images

President Donald Trump, bottom left, delivers a State of the Union address to a joint session of Congress at the U.S. Capitol in Washington, D.C., U.S., on Tuesday, Jan. 30, 2018.

Americans will cast their vote in the U.S. midterm elections on Tuesday and the results will set the tone for stock markets around the world.

Four hundred and thirty-five seats in the House of Representatives are up for grabs, while 35 of the 100 Senate seats will be on offer too. The big picture result will center around how easily President Donald Trump can enact legislation during the remainder of his term.

Betting markets have suggested that Democrats will gain control of the House, but Republicans will keep their grip on the Senate. Should that come to pass, it will make Trump's agenda harder to enact.

Since Trump's election, the S&P 500 stock market has risen more than 27 percent. That figure betters the early months of Bill Clinton, Ronald Reagan and George W. Bush. Barack Obama's numbers are much higher but stocks were springing back from the depths of the financial crisis.

Global stocks have struggled in 2018, especially in October, but analysts say if the Republicans hold on to both the House and the Senate, you can expect a return to buying.

The chief strategist at BNP Paribas Fortis, Philipe Gijsels, said winning both chambers allows Trump to continue a market friendly policy and says it could even see him become a little less hostile to China, producing a bump for international stocks.

The analyst added that even losing the lower House would only be market neutral and may even speed up a Trump deal with Beijing.

Gijsels put the odds of the Republicans losing both houses at just 10 percent but conceded that the scenario could see markets dip, with Trump's lack of domestic power leading him to double down on trade war tactics.

Deutsche Bank says the issues Americans appear to care about going into the election are health care, trade and immigration.

In a note last week, the bank's researchers forecast that full control for the Republican Party would likely see a rally in risk assets such as stocks. The bank added that any further fiscal stimulus, such as more tax cuts, would also benefit equities.

Deutsche cautioned on the idea that a sweeping Democrat victory would lead to any huge sell-off on stock markets, noting that the rival parties may then work together on a huge infrastructure package.

Edward Park, investment director at U.K. investment manager, Brooks Macdonald, said the importance of the midterms shouldn't be overplayed by investors.

Park said much of recent U.S. politics had been "driven by executive orders rather than legislation" and therefore Tuesday's elections could be less important to sentiment.

The asset manager said any real volatility may come from full Democratic control as markets would begin to price in a stronger chance of a presidential impeachment.