LONDON (Reuters) – Bond yields rose and tech stocks and the dollar fell Wednesday on the prospect of further stimulus and tighter regulation if Democrats take control of the US Senate after a Georgia ballot.
Raphael Warnock, a Baptist preacher from the historic Martin Luther King Jr. church, beat incumbent Republican Kelly Loeffler to become the first black senator in the history of the Deep South state.
Jon Ossoff, a documentary filmmaker who would become the youngest member of the Senate at 33, held a tight lead over looming David Perdue in the other contest, with an unforeseen end result until later Wednesday at the earliest.
Together with a narrow majority for Democrats in the House of Representatives, a “blue sweep” of Congress could usher in a broader fiscal stimulus and pave the way for President-elect Joe Biden to promote more corporate regulation and higher taxes.
Analysts generally believe that a Democrat-controlled Senate would be good for global economic growth and therefore for most riskier assets, but bad for bonds and the dollar assuming the U.S. budget and trade deficit were they will inflate further.
“The market is responding more or less as one would expect in terms of a likely Democratic victory, the 10-year is the biggest success,” said Derek Halpenny, MUFG’s head of research for global EMEA markets, pointing to the inflationary impact of further stimuli.
The 10-year US Treasury bond yield rose above 1% for the first time since March, based on expectations of higher government debt in a 50-50 Senate split with Vice President-elect Kamala Harris, in quality of president of the upper house, who becomes the switch.
German bond yields followed Treasuries to reach their highs in nearly five weeks. [GVD/EUR]
“A democratic clean sweep should raise expectations for US growth, with fairly obvious consequences for bond yields,” said Paul O’Connor, Janus Henderson Investors multi-asset manager.
“For equities, the implications are more complicated, with the projected increase in GDP somewhat offset by the prospect of higher taxes and more regulatory intrusion.”
Nasdaq futures fell 2% and S&P 500 futures 1%, fearing that Democrats might pursue tougher regulations on big tech companies. Great Tech stocks like Apple fell into pre-market trading.
Other sectors, such as banking, oil and gas and healthcare, may be subject to more scrutiny, while infrastructure and alternative the energy sectors could benefit from this.
Global equities gained 0.28%, towards recent all-time highs, and European equities were up 0.87%.
Futures for the Russell 2000 index, which tracks US small cap companies, rose 2.4% to a record high. Small cap stocks are generally seen as the first to recover as the US economy emerges from a recession.
In Asia, the Japanese Nikkei fell 0.4%, while the MSCI Asia Pacific ex-Japan index erased previous gains to trade flat.
The euro rose as high as $ 1.2344, a level last seen in April 2018, while the yen hit a 10-month high of 102.57 against the dollar. The dollar hit its lowest in nearly six years against the Swiss franc.
Bitcoin rose more than 5% to a record high of $ 35,879.
Oil prices extended gains, climbing to their highest since late February, after Saudi Arabia announced a massive voluntary production cut and, as an industry report shows, US inventories fell last week. [O/R]
US crude oil futures rallied to a high of $ 50.45 a barrel before cutting gains, after climbing 5% on Tuesday.
The international benchmark Brent crude oil futures rose 0.49% to $ 53.86.
Additional reports by Hideyuki Sano in Tokyo, Scott Murdoch in Hong Kong and Tom Westbrook in Singapore; Editing by Alex Richardson and Alison Williams