ANALYSIS: Democrats set to control Congress after Georgia wins

• Democrat Raphael Warnock edged out incumbent Republican Senator Kelly Loeffler (AP), and some outlets are also calling a win for Democrat Jon Ossoff in his race against Republican David Perdue (Decision Desk), although the Associated Press has not made a call yet after 98% of votes have been counted and there is a possibility of a recount.


• That would leave the split in the upper house at 50/50, giving Vice President(-elect) Harris the tie-breaking vote in the event of a deadlock. The upshot, is that Democrats will have control of both the House and the Senate, making it easier for Biden to pursue his policy agenda.


• The market expectation going into the event (with the exception of late Monday, and Tuesday) was that Senate control would be retained by Republicans, with the deadlock set to provide a risk-friendly scenario (split Congress has been good for equities). A Biden presidency is likely going to see higher corporation tax, a more activist regulatory approach, a pivot towards clean energy at the expense of traditional energy, and to build on the affordable care act.


• With that said, analysts are noting that there are still enough moderates in the Democrat party to ensure that much of the extreme leftist legislation a Biden administration might try and pursue could face some resistance from within his own party. Many are also highlighting that some of the apparently market-negative policies of Biden may also be offset by further rounds of fiscal stimulus, a chunk of which will be focussed on infrastructure, which will provide a pro-cyclical fiscal impulse, analysts say.


• Markets seem to be discounting the prospects of a Blue sweep by bidding up value vs growth (Russell 2000 future rose by around 2% before paring gains, while the Nasdaq 100 future is down nearly 2.0%), the yield curve is bear-steepening as markets price in more inflation (10-year yields have finally vaulted back above the psychological 1.0% mark, 2s10s is steepest since 2017, 5s30s widest since 2016; while average inflation expectations over the next decade are at the highest levels since 2018 at above 2.0%).


• Ahead we can expect a lot more coordination between the Fed and the Treasury (at the margin, this may make the Fed slightly more hawkish since it is assumed the Treasury will help with the lifting), and there is also hope that a Biden administration backed by a unified Congress might help the policy response to the pandemic take a more cohesive approach.

06 Jan 2021 - 08:01- Fixed IncomeResearch Sheet- Source: Newsquawk