SYDNEY, Jan. 6 (Reuters) – Asian markets were leaning towards a Democratic victory in crucial Senate contests on Wednesday, with Treasury yields hitting 10-month highs due to expectations of more debt-financed spending on stimulus from COVID, infrastructure and renewable energy.
Analysts generally assume that this would be positive for global economic growth and, therefore, for most risky assets, but negative for bonds and the dollar, as the US budget and trade deficits widen further.
The direct confrontation in Georgia for the two seats in the state Senate became necessary when no candidate in any of the disputes exceeded 50% of the votes in the November elections.
The results of the early vote were still very close and Democrats need to win both contests to take control of the Senate, while just one victory would leave Republicans in charge and likely lead to a legislative stalemate.
Democratic control of the Senate would give President Elect Joe Biden more room to act on his ambitious agenda, which includes new stimulus and infrastructure spending.
It may also include higher corporate taxes and stricter regulations, policies that are not normally favored by Wall Street.
This, in turn, can increase regulatory risks for banks, healthcare services, large technology companies and fossil fuels, while undermining tax profits and EPS assessments.
The risk was sufficient to see Nasdaq futures drop 1.1% in Asia, while S&P 500 futures lost 0.5%.
Yields on 10-year Treasury bills increased to 0.99%, the highest since the market’s chaos in mid-March and just a little bit of the 1.0% psychological bulwark.
“The market is having to look at potentially much higher bond yields from the implications of Biden’s deficit in budget arithmetic, assuming he has proven to be able to implement his plans,” added Ray Attrill, head of foreign exchange strategy at NAB.
“That said, there is a decent case for risky markets to be enamored with the prospect of stronger fiscal support in 2021, putting aside – but not indefinitely – concerns about higher taxes and regulations.”
Analysts assume that a much-needed ostentation in infrastructure would be positive for economic growth, jobs and sectors like construction and transportation.
However, it would have to be financed by more loans, a negative value for the dollar that is already creaking under the weight of the inflated budget and trade deficits.
“The basic US balance of payments – the current account plus long-term investment flows – is the most negative in over a decade, suggesting that there is no underlying demand for dollars,” said Elias Haddad, senior foreign exchange strategist at CBA. (Reporting by Wayne Cole; Editing by Sam Holmes)