Reflation trades are getting a new lease on life after the Democrats edged closer to Senate control in Georgia’s runoff elections.
Small-cap stocks and banks are winning while the yield curve is steepening as a fresh wave of money gushes into bets tied to more economic stimulus.
The Russell 2000 gauge of mid- to small-cap companies rallied 1.9% at the New York open. Meanwhile, the Nasdaq 100 fell as much as 1.8% on fears Democrats may raise taxes and tighten regulations on the tech behemoths, while rising bond yields made near-historically high valuations harder to justify in equities.
Benchmark 10-year Treasury yields climbed past 1% as market indicators of inflation expectations reached a two-year high. The most economically sensitive sectors from financials to energy led gains.
Wall Street has been fixated on the Georgia race, with reflation bulls counting on a Democrat sweep to usher in further fiscal support for an economy ravaged anew by the latest surge in coronavirus cases. Meanwhile the stimulus cheer for now is lost on tech companies that dominate capitalization-weighted benchmarks, which have soared anew in the stay-at-home era.
“Investors will now be dusting off the blue-wave playbook,” Paul O’Connor, head of multi-asset at Janus Henderson Investors, wrote in a note. “A Democrat clean-sweep should lift expectations for U.S. growth, with fairly obvious consequences for bond yields.”
In Georgia, Democrat Raphael Warnock has secured his victory, the Associated Press reported Wednesday. Jon Ossoff is seen holding a slim lead over his Republican opponent, with a narrow margin potentially sparking legal challenges and recounts.
Should Democrats win both seats in Georgia, they will gain control of the White House and Congress, making it easier to push through their agenda with Vice President-elect Kamala Harris empowered to break any 50-50 tie in the Senate.
Whether you slice and dice it by quantitative factors, asset class or equity sectors, risk-on trades are rippling through global markets Wednesday.
The financial sector was the S&P 500’s best performer. WTI crude traded near a 10-month high, aided by the election results as well as Saudi Arabia’s announcement of a production cut on Tuesday. In emerging markets, currencies rose against the greenback and an MSCI index of their stocks reached a 13-year high.