NEW YORK / LONDON / SYDNEY (Reuters) – Increasing prospects of a Democratic victory in two major US Senate competitions gave momentum to the financial market Wednesday that mirrors expect more COVID-19-related stimulus and increased regulatory scrutiny of tech companies.
Analysts generally consider a Democrat-controlled Senate – one that can increase fiscal spending while raising the possibility of tax increases and tighter regulation – to be a net positive for economic growth globally and thus for most risk assets , But negative for bonds and dollars as US budget and trade deficit may widen further.
Shares, soon after the US market opened, saw growth in the infrastructure and renewable energy sectors, while the Nasdaq, broader S&P 500 index for large tech stocks slipped more than 0.5%, rising 0.25%.
Democrats need to win both contests to occupy the Senate, while just one win will likely remain for Republican incharge and legislator gridlock. Rafael Warnock, a Baptist preacher, defeated Republican US commander Kelly Loeffler, while John Ossoff, a documentary filmmaker, maintained a narrow lead over consecutive David Perdue in a race that has yet to be called.
Democratic control of the Senate will give more scope for President-Elect Joe Biden to act on his ambitious agenda, including new incentives and infrastructure spending.
This could pave the way for higher corporate taxes and stricter regulations, not policies generally supported by Wall Street.
“What happened last night was a game-changer,” said Phil Orlando, Fed Orlando’s chief equity market strategist. “The Blue Wave scenario is back now and you will have Senate Majority Leader Chuck Schumer set the agenda and Mitch McConnell will not.”
Consistent with those beliefs, 10-year US bonds sold, giving 1% topping for the first time in 9–1 / 2 months. The dollar fell to its lowest level since March 2018, falling 13% since March.
“The US 10-year Treasury has taken over 1% yields for the first time in nine months – correctly identifying the potential for greater stimulus that can buy markets even above their current highs and as a result we have seen inflation. Expectations also start ticking, ”said Stuart Clarke, portfolio manager at Quilter Investors.
For a graphic on a 10-year yield:
Increasing yields of some of those risks, along with JP Morgan and Bank of America, led to more than 3% gain in the open, while their European peers worked hard with the region’s banking index up to around 6%.
The Russell 2000 index – which tracks US small cap companies – rose 2.2% and was hovering near record highs. Small-cap stocks are usually seen as the first to recover as the US economy grows out of recession.
European Renewable Energy Stock – Already in hopes of a gain in November since the US presidential elections, a Democratic ‘Blue Wave’ will receive a ‘green wave’ of rising spending on renewable energy.
Biden bounces on win for graphic on green stock:
Shares of European wind-turbine manufacturer Vestas Wind Systems and Siemens Games rose 3% and 2.4% respectively.
However, some investors were cautious about the possibility of widespread change.
“While change is in the air for America, the change in American law may not be very radical,” said Holger Schmieding, Bernburg’s chief economist.
“With Democrats 50:50 distribution of seats in the Senate if Democrats really do prevail in Georgia, any law that does not garner some bipartisan support would have to be supported by the most liberal Democrats in the Senate to become law.” Democrats are not in favor of being called “very progressive” policies in the US
Analysts believe that much needed work on infrastructure will be positive for economic growth, jobs and sectors like construction and transportation.
Yet it would have to be financed by more borrowing, a downside to the dollar that is already peaking under the balloon budget and trade deficit burdens.
“The US principal balance of payments – current account and long-term is investment investment flow – is the most negative in a decade, suggesting that there is no underlying demand for the dollar,” said Ilyas Haddad, a senior CBA strategist.
Reporting by Ritwik Carvalho, Wayne Cole and Kevin Buckland; Editing by Sam Holmes, Richard Pullin and Nick Ziminski