From Japan to Brazil, the dense 2026 election cycle is injecting fresh uncertainty into global markets already roiled by US policy volatility and geopolitical tensions. This weekend's snap election in Japan is the most unpredictable in years, votes across Latin America will test the region's rightward shift, while the US midterm elections in November represent a crucial test for the Trump administration.
According to analysis, Japanese Prime Minister Sana Takaichi seeks to convert her personal approval ratings into an endorsement for her expansionary fiscal policies, which could further loosen the purse strings in the developed world's most indebted nation relative to GDP. Investors anticipate sustained pressure on Japanese bonds, with some analysts forecasting the 10-year government bond yield could rise to 3% this year from the current level of just over 2%.
Across the Atlantic, the US midterm elections will determine control of Congress. Polls indicate widespread public dissatisfaction with Trump's economic management, and Trump recently conceded that Republicans might struggle to maintain their narrow majority in Congress. Affordability issues have taken center stage, prompting the White House to urgently propose multiple measures aimed at alleviating public cost-of-living concerns.
The ramifications of these elections extend far beyond their national borders. The yen's movement has decoupled from US-Japan interest rate differentials, shifting focus to fiscal stimulus; Latin American bond investors are betting that right-wing governments will restore orthodox economic policies; while Guy Miller, Chief Market Strategist at Zurich Insurance, noted that Trump's policies ahead of the midterms "will affect all of us."
Japan: The Developed World's Most Aggressive Fiscal Gamble Analysis suggests the February 8th snap election in Japan could initiate a new round of fiscal expansion in the developed world's most indebted nation. Sana Takaichi hopes the election will solidify her coalition government's parliamentary position and secure support for expansionary fiscal policies. Recent polls show her approval rating has dipped slightly.
While the yen typically moves in tandem with US-Japan yield differentials, this relationship broke down last year, with fiscal stimulus becoming the dominant factor. Investors expect continued pressure on Japanese bonds, with analysts predicting the 10-year government bond yield could reach 3% this year.
US Midterm Elections: A Critical Test for Trump The November US midterm elections, which will determine control of Congress, represent a major test for the Trump administration. Analysis indicates affordability issues are a core topic, leading the White House to hastily propose various measures, including capping credit card interest rates, to address public cost-of-living concerns.
According to a Reuters/Ipsos poll, there is general dissatisfaction among Americans regarding Trump's economic performance. Historically, the incumbent president's party often underperforms in midterm elections, and Trump recently acknowledged Republicans might struggle to maintain their slim congressional majority. Zurich Insurance Chief Market Strategist Guy Miller stated:
"The President clearly wants to see robust growth and rising financial markets, which will form a key part of his narrative and policies in the coming months. The policy path to the election will affect all of us."
Latin America: Testing the Rightward Trend Colombian voters will go to the polls up to three times starting in March to elect new legislators and a president to replace leftist President Gustavo Petro, who clashed with Trump. While Colombian stocks outperformed regional peers last year, bond investors hope the Latin American rightward trend will also sweep Colombia, restoring orthodox economic policies.
Nicolas Jaquier, Portfolio Manager at Ninety One, stated: "A shift to the right opens the possibility for some fiscal adjustment." He noted that if Ivan Cepeda from Petro's coalition wins, it could allow for structural reforms to the central bank and supreme court, removing obstacles that previously hindered some of Petro's policies.
In Brazil's October election, 80-year-old leftist President Lula leads right-wing Senator Flavio Bolsonaro in polls. Geronimo Mansutti of Tellimer warned that a Lula victory "could be quite negative for prices" due to concerns over "massive deficits and a higher debt trajectory over the next four years." Brazil's Finance Ministry currently forecasts the country's total debt will peak at 88.6% of GDP in 2032, higher than the previous forecast of 84.3% in 2028.
However, Jaquier pointed to Lula's value as a "known quantity," describing him as pragmatic and likely to appoint a credible team for fiscal adjustment.
Europe: Political Shifts Rattle Bond Markets Hungary's April election represents the opposition's best chance in years to end Prime Minister Viktor Orban's 16-year rule. The center-right Tisza party leads Orban's right-wing Fidesz party in polls, but the outcome remains uncertain. With cost-of-living concerns high, Orban has used fiscal handouts to soothe voter anxiety.
Fitch Ratings downgraded Hungary's credit outlook to negative last year, citing a "significant deterioration" in public finance forecasts reflecting pre-election measures. Tisza has pledged to repair relations with the EU and unlock funds. Luis E. Costa of Citi estimates this could mobilize €10 billion ($11.9 billion), which, combined with other reforms, "could enable higher investment spending while reducing the fiscal deficit and risk premium."
UK local elections in May may also attract foreign investor attention. The ruling Labour party trails the Reform UK party in polls and struggles to deliver on its promise to boost the economy. Markets are sensitive to any signs that fiscally prudent Starmer could be replaced, as evidenced by recent bond sell-offs. Sam Cartwright, UK economist at Societe Generale, stated that in his base case, even if Starmer is replaced, a new leader would have little room to significantly increase government borrowing.
Frontier Markets: Electoral Tests Post-Debt Restructuring Both Ethiopia and Zambia, which are struggling to recover from debt defaults, will hold elections this summer. Prime Minister Abiy Ahmed's Prosperity Party is almost certain to win the June vote, as main opposition parties plan to boycott.
In Zambia, President Hakainde Hichilema is currently expected to win in August, but Chatham House experts warn that despite progress on debt restructuring and economic reforms, living standards for the populace have not yet improved.
Investors are closely watching both countries for opportunities in frontier markets. Zambia's economy has shown more resilience than expected, while Ethiopia's defaulted bonds, though still in default, are trading above face value.
Comments