Bond yields, bitcoin and small cap stocks surged while tech stocks and the dollar tumbled on Wednesday on the prospect of more stimulus and tougher tech regulation if Democrats take control of the U.S. Senate following a run-off election in Georgia. Stocks in Europe rose and those in Asia were mixed as traders digested what's next for global politics. Despite all the turmoil, S&P futures were surprisingly flat, trading down just -0.2% at last check.
The real action however was below the surface with Nasdaq futures sinking 1.5% with Apple, Microsoft, Intel and Cisco all falling up to 2% or more in U.S. pre-market trading as investors priced in the prospect of a Democrat-controlled Senate that could lead to tighter regulations on technology mega-caps...
... however, with a flood of new reflationary stimulus on deck, small caps soared with Russell futures hitting a new all time high.
”The market is pulling in implications of what a Democrat win would mean for the economic recovery,” said Peter Rosenstreich, head of market strategy at Swissquote Bank. “Expected increase in fiscal stimulus and infrastructure spending would bode well for cyclical or growth stocks. Tech stocks may not benefit as much, and that may have something to do with their stretched valuations.”
Bets on more stimulus pushed 10Y Treasury yields above 1% for the first time since March as investors rotated out of technology and into cyclical stocks. German bond yields followed Treasuries to hit their highest in almost five weeks.
“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.
In Treasuries, if lawmakers approved additional stimulus spending, it would mean more bond issuance and higher yields on longer-maturity Treasuries. Traders now see U.S. inflation averaging just over 2% per year over the coming decade, the highest level since 2018. But for the stock market, there’s a risk that a unified, Democrat-controlled Congress would portend higher corporate taxes and more regulation. Technology companies dominate U.S. benchmarks, giving the industry an outsized importance.
“What looks like good news for the U.S. economy is probably bad news for the relative performance of U.S. stocks,” said Paul O’Connor, head of multi-asset at Janus Henderson Investors.
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For those who missed last night's action, Raphael Warnock, a Baptist preacher from the 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. At last check, the two were locked in a dead heat with some absentee votes yet to be counted and as many as 17,000 military and overseas ballots due by Friday.
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 much higher taxes.
Analysts generally assume a Democrat-controlled Senate would unleash a debt tsunami and thus be positive for economic growth at least in the short term, while boosting reflationary assets, and negative for duration assets such as bonds as well as the dollar as the U.S. budget and trade deficits will explode.
“A Democrat clean-sweep should lift expectations for U.S. 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.”
World stocks gained 0.28%, towards recent record highs, and European stocks rose 0.87%. European equities rallied after a choppy start, with the Stoxx 600 rising 0.9%, and the FTSE 100 markedly outperforming with gains of ~2.3%. Banks, oil & gas and construction names are the best performers. European tech sector lagged as Nasdaq futures extend Asia’s losses, snapping through Monday’s lows.
Asia’s benchmark stock gauge swung between gains and losses as traders awaited the outcome of Senate runoff elections in Georgia, with the broader MSCI Asia Pacific Index little changed after an eight-day winning run. Equities in Southeast Asia and Australia were among the biggest losers. Benchmarks in the Philippines and Indonesia slid more than 1% on concerns over a potential resurgence in coronavirus infections and tighter government control measures. “Markets are letting go gains as races in Georgia are running tight, creating much political uncertainty that markets tend to dislike,” said Margaret Yang, a strategist at DailyFX. “If Republicans win one of the two seats, it may hinder Biden’s ambition to push through a larger stimulus plan and infrastructure projects.” Technology and health care were the biggest losers among industry groups in Asia. Energy was the best-performing sector after Saudi Arabia surprised the market with a large cut in crude production. Chinese stocks rose. Internet giants Tencent and Alibaba climbed in Hong Kong, shrugging off President Donald Trump’s order banning U.S. transactions with eight Chinese software apps. In South Korea, a bout of foreign selling saw the benchmark Kospi index reverse early gains that propelled it beyond the 3,000 mark for the first time
In response to the imminent Blue Sweep and resultant money printing bonanza, cryptos exploded and Bitcoin traded above $35,000 for the first time in Asia on Wednesday, rising to a high of $35,879 and extending a rally that has seen the digital currency rise more than 800% since mid-March. The world’s most popular cryptocurrency crossed $20,000 for the first time ever on Dec. 16.
In rates, treasury futures rose off lows for the day, although cash curve broadly hold sharp bear-steepening move after Democrats captured one seat in the Georgia runoff elections and await results on the remaining seat to secure a narrow majority. Treasury 10-year yields peaked at 1.034%, cheapest since March before settling back down to around 1.01% into early U.S. session, still cheaper by more than 5bp vs Tuesday’s close. The long- end led selloff aggressively steepened the Treasuries curve with 2s10s wider by nearly 5bp, 5s30s more than 3bp. Bund and gilt curves also bear steepened. Long-end treasuries traded ~4bps cheaper to bunds, 3bps cheaper to gilts. Peripheral spreads are marginally wider to core.
In FX, the dollar erased an intraday gain to fall 0.2% with the Bloomberg dollar index printing fresh lows for the week. “Underlying weakness of the greenback stays in place,” said Toshiya Yamauchi, chief manager for foreign-exchange margin trading at Ueda Harlow Ltd. in Tokyo. “The market needs to confirm the results of Georgia’s elections to determine trend of the dollar."
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. G-10 ranges are relatively narrow, but the broader trend of dollar weakness persists. NOK, AUD and NZD top the G-10 scoreboard. TRY rallies 0.8% against USD to lead gains in EM FX.
In commodities, 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 U.S. inventories fell last week. WTI futures rose to a high of $50.45 a barrel before trimming gains, having climbed 5% on Tuesday. Brent crude futures rose 0.49% to $53.86. Spot gold drifted higher, stalling near $1,959/oz. Base metals are in the green; LME copper outperforms with a ~1.8% gain.
Looking at the day ahead, the highlight will be the aforementioned joint session of Congress to count the electoral votes from the US presidential election. Otherwise, data highlights include the services and composite PMIs from Italy, France, Germany, the Euro Area, the UK, Brazil and the US, along with the preliminary CPI reading for December from France and Germany, as well as US data on November factory orders, and the ADP’s December employment report. Finally from central banks, the FOMC will be releasing their December meeting minutes, and Bank of England Governor Bailey will be speaking before the Treasury Select Committee.
Market Snapshot
S&P 500 futures down 0.3% to 3,708.25
Brent futures up 1.7% to $54.49/bbl
Gold spot up 0.3% to $1,956.57
U.S. Dollar Index down 0.2% to 89.30
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