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Georgia Elections: Weaker Dollar And Tsys In Dem Sweep (2/3)

MARKET STRATEGY
  • ING sees higher taxes/tighter regulations delayed in a Dem senate until 2022/2023 with focus on getting economy on track. Dem wins = 10Yr Tsy yields closer to 1% and widened differentials w the Eurozone. 10Y Tsys to cheapen further vs 2s and 30s. There is a risk inflation expectations could rise further, leading an earlier pricing of Fed lift-off and pushing real and nominal yields higher - 5s would cheapen vs 2Y and 10Y in this case. Republican Senate retention = less fiscal stimulus, but the quid pro quo being less aggressive tax hikes in future.
  • Barclays writes that a Dem sweep and a "potential rapid increase in US yields triggered by expectations of a faster recovery/fiscal slippage would be a drag for risky assets, including EM FX in this scenario". But looking at the bigger picture, market reaction would be short-lived, with a 50-50 Senate precluding large policy shifts, and Biden set to focus on the pandemic initially.
  • Goldman: Dem sweep of both seats would see around $600bn added to the $900bn already enacted, but would mean tax hikes down the road (but split Senate means not as high a degree of tax increase as envisaged in the Democratic platform).
  • JPMorgan believes a Democratic sweep would be a "genuine surprise" and would see the USD weaken and Tsy yields rise.
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