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SYDNEY, Jan.6 (Reuters) – Asian markets were leaning towards a Democratic victory in crucial Senate competitions on Wednesday as Treasury yields hit 10-month highs on expectations of more debt-financed spending for stimulus COVID, infrastructure and renewable energy.
Analysts generally assume 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 even further.
The second round of elections in Georgia for the two state Senate seats became necessary when no candidate of either race exceeded 50% of the vote in the November election.
The results of the early vote were still very close and Democrats must win both contests to take control of the Senate, while a single victory would allow Republicans to stay in charge and likely lead to a legislative deadlock.
Democratic scrutiny of the Senate would give President-elect Joe Biden more leeway to implement his ambitious agenda, which includes new stimulus and infrastructure spending.
It could also include higher corporate taxes and tighter regulations, policies generally not favored by Wall Street.
This in turn could increase regulatory risks for banks, healthcare, big tech and fossil fuel companies, while reducing after-tax profits and BPA valuations.
The risk was enough to see Nasdaq futures slipping 1.1% in Asia, while S&P 500 futures fell 0.5%.
Yields on 10-year Treasuries hit 0.99%, the highest since the mid-March stock market chaos and a few steps from the psychological bulwark of 1.0%.
“The market needs to consider potentially much higher bond yields due to the deficit implications of Biden’s budget arithmetic, assuming he’s proven able to execute his plans,” added Ray Attrill, head of the foreign exchange strategy at NAB.
“That said, there is good reason for risk markets to be enticed by the prospect of stronger fiscal support in 2021, setting aside for now – but not indefinitely – concerns about rising taxes and regulations.
Analysts speculate that a much-needed infrastructure craze would be positive for economic growth, jobs and sectors such as construction and transportation.
Yet it should be financed by more borrowing, a negative point for the dollar which is already creaking under the weight of the budget surge and trade deficits.
“The United States’ basic balance of payments – the current account and long-term investment flows – is the most negative in more than a decade, suggesting that there is no demand under -jacent dollars, ”said Elias Haddad, senior currency strategist at the CBA. (Reporting by Wayne Cole; Editing by Sam Holmes)
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