LONDON / SYDNEY (Reuters) – Growing chances of Democratic victories in two major Senate contests on Wednesday sparked financial market moves that mirror hopes of further COVID-19-related stimulus and greater regulatory scrutiny of tech companies.
Analysts generally assume that a Democrat-controlled Senate would be good for global economic growth and thus most risk assets, but bad for bonds and the dollar as the U.S. budget and trade deficit could widen further.
In equities, the infrastructure and renewable energy sectors were on the rise, while the Nasdaq, home to big tech stocks, took a hit.
The early voting results were still very close and Democrats must win both contests to take control of the Senate, while only one victory would see Republicans stay in office and likely lead to a legislative block.
Raphael Warnock, the Democrat trying to unseat US Republican Senator Kelly Loeffler, was leading in one of two contests, although none of the major news outlets had predicted a winner for either race.
Consistent with these assumptions, US 10-year bonds were sold, with yields exceeding 1% for the first time in 9-1 / 2 months. The dollar fell further to its lowest levels since March 2018, adding a 13% drop from March.
“US 10-year Treasuries reversed the yield by more than 1% for the first time in nine months, correctly identifying the potential for more stimulus that could support markets even from their current highs and as a result we have also seen inflation expectations rise, ”said Stuart Clark, portfolio manager at Quilter Investors.
For an image on tmsnrt.rs/35f704y:
Democratic control of the Senate would give President-elect Joe Biden more room to act on his ambitious agenda, which includes new stimulus and infrastructure spending.
It could also include higher corporate taxes and stricter regulations, policies not typically favored by Wall Street.
This in turn could increase regulatory risks for banks, healthcare, large tech companies and fossil fuel companies, while reducing after-tax earnings and EPS valuations.
The risk was enough to see NASDAQ futures down 2% and Frankfurt-listed shares by Apple, Alphabet and Microsoft discount 1.5%.
Rising yields outweighed some of these risks in banks with JPMorgan of Wall Street and Bank of America poised to make 2% gains at the opening, while their European peers rallied sharply with the region’s banking index in rise of 4.4%.
Futures for the Russell 2000 Index, which tracks US small cap companies, were up 1.7% and were just below an all-time high. Small cap stocks are generally seen as the first to recover as the US economy emerges from a recession.
Europe’s renewable energy stocks – already on the rise since the US presidential election in November – added to the gains, based on expectations that a democratic “blue wave” would trigger a “green wave” of increased spending on renewable energy.
For a graph on the surge in green stocks on Biden’s victory:
Shares of European wind turbine manufacturer Vestas Wind Systems and Siemens Gamesa increased by 3% and 2.4% respectively.
However, some investors have been cautious about the potential for radical change.
“While change is in the air for the United States, changes in US legislation may not be very radical,” said Holger Schmieding, Berenberg’s chief economist.
“With a 50:50 distribution of Senate seats if Democrats really prevail in Georgia, any legislation that doesn’t garner bipartisan support would have to be backed by the more moderate Democrats in the Senate to become law. Not all Democrats are in favor of what are called “very progressive” policies in the United States “
Analysts believe much-needed infrastructure craziness would be good for economic growth, jobs, and sectors like construction and transportation.
Yet it should be financed by more loans, a negative value for the dollar that is already creaking under the weight of the growing budget and trade deficit.
“The US basic balance of payments – current account plus long-term investment flows – is the most negative in over a decade, suggesting there is no underlying demand for dollars,” Elias said. Haddad, a senior currency strategist at CBA.
Ritvik Carvalho, Wayne Cole and Kevin Buckland reporting; Editing by Sam Holmes and Richard Pullin