Markets shift to price in chance of Democrat Senate wins

LONDON/SYDNEY: The growing chance of Democratic wins in two pivotal Senate contests on Wednesday triggered financial market moves mirroring hopes of more COVID-19-related stimulus and increased regulatory scrutiny of tech companies.

Analysts generally assume a Democrat-controlled Senate would be positive for economic growth globally and thus for most risk assets, but negative for bonds and the dollar as the US budget and trade deficits may widen further.

In stocks, infrastructure and renewable energy sectors were rising, while the Nasdaq, home to big tech stocks, took a hit.

Early voting results were still very close and Democrats need to win both contests to take control of the Senate, while just one win would see Republicans remain in charge and likely lead to legislative gridlock.

Raphael Warnock, the Democrat seeking to unseat Republican US Senator Kelly Loeffler, held the lead in one of two races, although no major news outlet had projected a winner for either contest.

In line with those assumptions, 10-year US bond sold off, with yields topping 1% for the first time in 9-1/2 months. The dollar fell further to its lowest levels since March 2018, adding to a 13% decline since March.

"US 10 year Treasuries have tipped over 1% yield for the first time in nine months - correctly identifying the potential for greater stimulus which could buoy markets even from their current highs and as a result we have seen inflation expectations start to tick up also," said Stuart Clark, portfolio manager at Quilter Investors.

Democratic control of the Senate would give more scope for President-elect Joe Biden to act on his ambitious agenda, which includes new stimulus and infrastructure spending.

It might also include higher corporate taxes and tighter regulations, policies not typically favoured by Wall Street.

That in turn could increase regulatory risks for banks, healthcare, big-tech and fossil fuel companies, while crimping after tax earnings and EPS valuations.

The risk was enough to see NASDAQ futures down 2% and the Frankfurt-listed shares of Apple, Alphabet and Microsoft off 1.5%.

Rising yields outweighed some of those risks in banks with Wall Street's JPMorgan and Bank of America poised for 2% gains at the open, while their European peers rallied hard with the region's banking index up 4.4%.

Futures for the Russell 2000 index - which tracks US small-cap companies - rose 1.7% and were just shy of a record high. Small cap stocks are generally seen as the first to recover as the US economy pulls out of a recession.

European renewable energy stocks - already up since the US presidential elections in November added to gains, on expectations that a Democratic 'Blue Wave' would unleash a 'green wave' of increasing spending on renewable energy.

Shares in European wind-turbine maker Vestas Wind Systems and Siemens Gamesa rose 3% and 2.4% respectively. Some investors were cautious about the potential for sweeping changes, however.

"While change is in the air for the US, changes in US legislation may not be very radical," said Holger Schmieding, chief economist at Berenberg.

"With a 50:50 distribution of seats in the Senate if the Democrats indeed prevail in Georgia, any legislation that does not garner some bipartisan support would have to be backed by the most moderate Democrats in the Senate to become law. Not all Democrats are in favour of what are called "very progressive" policies in the US"

Analysts assume a much-needed splurge on infrastructure would be positive for economic growth, jobs and sectors such as construction and transport.

Yet it would have to be funded by more borrowing, a negative for the dollar which is already creaking under the burden of ballooning budget and trade deficits.

"The US basic balance of payments - the current account plus long-term investment flows - is the most negative in over a decade, suggesting there is no underlying demand for dollars," said Elias Haddad, a senior currency strategist at CBA.