SYDNEY, Jan. 6 (Reuters) – Asian markets leaned towards a Democratic victory in pivotal senate games on Wednesday as Treasury yields hit a 10-month high based on expectations of more debt-funded spending on COVID stimulus, infrastructure and renewable energy.
Analysts generally assume this would be positive for global economic growth and thus most risky assets, but negative for bonds and the dollar as the US budget and trade deficits widen further.
The direct consecutive elections in Georgia for the state’s two senate seats became necessary when no candidate in either race reached more than 50% of the vote in the November election.
Early voting results were still close and Democrats must win both games to gain control of the Senate, while just one win would keep Republicans in charge and likely lead to a deadlock in legislation.
Democratic control of the Senate would give President-elect Joe Biden more room to pursue his ambitious agenda, including new stimulus measures and infrastructure spending.
It could also include higher corporate taxes and tougher regulations, policies not usually favored by Wall Street.
That, in turn, could increase regulatory risks for banks, healthcare, big-tech and fossil-fuel companies as it shrinks after tax revenues and EPS valuations.
The risk was enough to cause Nasdaq futures in Asia to fall 1.1%, while S&P 500 futures lost 0.5%.
Yields on 10-year Treasury bonds rose to 0.99%, the highest since the market chaos in mid-March and only a whisker of the 1.0% psychological stronghold.
“The market should consider potentially much higher bond yields because of the deficit implications of Biden budgetary arithmetic, assuming he was able to execute his plans,” added Ray Attrill, head of FX strategy at NAB.
“That said, it is well argued that risk markets are enamored with the prospects of stronger fiscal support in 2021, setting aside concerns about higher taxes and regulation for the time being, but not indefinitely.”
Analysts believe a much-needed splurge on infrastructure would be positive for economic growth, jobs and sectors such as construction and transportation.
Still, it should be funded by borrowing more, a negative point for the dollar already cracking under the burden of rising budget and trade deficits.
“The US basic payments balance – the current account plus long-term investment flows – is the most negative in more than a decade, suggesting there is no underlying demand for dollars,” said Elias Haddad, a senior currency strategist at CBA. (Reporting by Wayne Cole; Edited by Sam Holmes)