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Markets

Treasury yields soar, tech stocks crumble on possible Georgia 'blue sweep'

  • Democrats could win both races in key Georgia run-offs.
  • S&P500 futures down 1%, European shares up 0.87%.
  • Big tech regulation fears push Nasdaq futures down 2%.
  • US 10-year yield rises above 1%, highest since March.
  • US small-cap futures hit record highs.
06 Jan 2021

LONDON: Bond yields rose and tech stocks and the dollar fell on Wednesday on the prospect of more stimulus and tougher regulation if Democrats take control of the US Senate following a run-off election in Georgia.

Raphael Warnock, a Baptist preacher from the historic church of Martin Luther King Jr., beat Republican incumbent Kelly Loeffler to become the first Black senator in the history of the deep South state.

Jon Ossoff, a documentary filmmaker who at 33 would become the Senate's youngest member, held a narrow lead over incumbent David Perdue in the other race, with a final outcome not expected until later on Wednesday at the earliest.

Along with a narrow majority for Democrats in the House of Representatives, a "blue sweep" of Congress could usher in larger fiscal stimulus and pave the way for President-elect Joe Biden to push through greater corporate regulation and higher taxes.

Analysts generally assume a Democrat-controlled Senate would be positive for economic growth globally and thus for most riskier assets, but negative for bonds and the dollar on the assumption the US budget and trade deficits would swell even further.

"The market is pretty much responding as you would expect in terms of the probable Democrat victory, the 10-year being the biggest standout," said Derek Halpenny, MUFG's head of research for EMEA global markets, pointing to the inflationary impact of more stimulus.

The 10-year US Treasuries yield rose above 1% for the first time since March, on expectations of larger government borrowing under a Senate split 50-50 with Vice President-elect Kamala Harris, as president of the upper chamber, becoming the tie-breaker.

German bond yields followed Treasuries to hit their highest in almost five weeks.

DOLLAR DOLDRUMS

"A Democrat clean-sweep should lift expectations for US growth, with fairly obvious consequences for bond yields," said Paul O'Connor, head of multi-asset at Janus Henderson Investors.

"For equities the implications are more complicated, with the anticipated GDP boost being somewhat offset by the prospect of higher taxes and greater regulatory intrusion."

Nasdaq futures dropped 2% and S&P 500 futures fell 1%, on fears Democrats could pursue tighter regulations on big tech firms. Big Tech stocks such as Apple fell in pre-market trade.

Other industries, such as banks, oil and gas and healthcare, could come under heavier scrutiny, while infrastructure and alternative energy sectors could benefit.

World stocks gained 0.28%, towards recent record highs, and European stocks rose 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 pulls out of a recession.

In Asia, Japan's Nikkei fell 0.4% while MSCI's index of Asian-Pacific excluding Japan erased earlier gains to trade flat.

The euro rose to as high as $1.2344, a level last seen in April 2018, while the yen hit a 10-month high of 102.57 to 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, rising to their highest since late February, after Saudi Arabia announced a big voluntary production cut, and as an industry report showed US inventories fell last week.

US crude futures rose to a high of $50.45 a barrel before trimming gains, having climbed 5% on Tuesday.

International benchmark Brent crude futures rose 0.49% to $53.86.