SYDNEY, Jan. 6 (Reuters) – Asian markets are heading for a democratic victory in key Senate contests on Wednesday as Treasury yields hit 10-month highs against expectations of higher debt-financed spending on the COVID stimulus, 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 grow even more.
Head-to-head elections in Georgia for the state’s two Senate seats became necessary when neither candidate outperformed 50% of the vote in the November election.
The expected results of the vote were still very close, and Democrats must win both contests to take control of the Senate, while a single victory would keep Republicans in the lead and likely lead to a legislative blockade.
Democratic control of the Senate would give President-elect Joe Biden more opportunity to act on his ambitious agenda, which includes new incentives and infrastructure spending.
It could also include higher corporate taxes and stricter regulations, policies that are not usually favored by Wall Street.
This, in turn, could increase regulatory risks for banks, healthcare, high-tech companies and fossil fuels, while evading tax gains and EPS assessments.
The risk was enough to see Nasdaq futures fall 1.1% in Asia, while the S&P 500 futures lost 0.5%.
Yields on 10-year treasury bills rose to 0.99%, the highest since the market chaos in mid-March and just a 1.0% psychological bastion must.
“The market needs to consider potentially much higher bond yields from the implications of the Biden budget arithmetic deficit, assuming it has proven to be able to implement its plans,” added Ray Attrill, head of FX strategy at NAB.
“That being said, a decent case is being made for risk markets to fall in love with the prospects of stronger fiscal support in 2021, putting aside for the time being – but not endlessly – concerns about higher taxes and regulations.”
Analysts assume that a much-needed explosion on infrastructure would be positive for growth, jobs and sectors such as construction and transport.
However, it should be financed by more loans, a negative for the dollar, which is already squeaking under the growing budget and trade deficits.
“The balance of payments in the US – the current account plus long-term investment flows – is the worst in ten years, 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)