Biden and Democrats take control despite Trump protesters

• Georgia runoffs results: The 2020 US general elections ended on 6 January 2021 with a Democratic sweep of two critical Georgia Senate seats, giving Democrats a slim majority and control of government until at least the next round of Congressional elections in two years. The stunning developments on Capitol Hill will not change the significance of the Georgia election, which will have far-reaching implications for Biden’s policy agenda and financial markets.
• Political implications: The election of two liberal Senators could embolden the progressive wing of the Democratic Party, leading to pressure on the President-elect to pass a more progressive agenda and expose tensions between the progressive and mainstream wings of the Democratic Party, and a governor on the scope of policy change. President Trump may be losing his position as the most popular political figure in the Republican party. This could widen the fissure in the Republican party between the Trump wing that appeals to the working class with a populist appeal, and the traditional wing led by the Republican leadership in the Senate that has recently rediscovered its fiscal-prudence DNA.
• Policy implications: Democratic control of the Senate ensures that Biden will be able to get his cabinet approved. We could see another fiscal stimulus bill being passed in late Q1. We expect at least $600 billion in additional fiscal stimulus, which will include $1,400 stimulus checks for many Americans, continuation of enhanced unemployment benefits, and $160 billion of assistance to state and local governments. A hike in taxes to the highest tax bracket and a hike in corporate and capital gains taxes are on the table and will be negotiated heavily. Any infrastructure bill is likely to include some elements of the Green New Deal. There is likely to be a modest expansion of Obamacare. Biden wants to hike the minimum wage to help address income inequality, and Democrats are likely to attempt to pass legislation. But they will need broad bipartisan support to avert a filibuster that could block it in Congress.
• Investment implications: More fiscal stimulus and ensuing bond issuance, as well as a likely infrastructure bill, will put upward pressure on US yields. The curve should continue to steepen as expectations for stronger growth rise and the Fed Funds rate remains near zero. Corporate credit spreads may be supported initially by increased stimulus spending and pent-up demand for services. Later, they will face a headwind with weaker profitability associated with higher expenses from taxes, borrowing costs and regulation. Fed quantitative easing will stay supportive of agency mortgages. The risk of credit dislocations in state and local government finances is materially lower with Democrats driving allocation of additional stimulus. While productivity gains could serve to offset inflationary pressures in the medium term, ballooning deficits and a weaker dollar support the longer-term case for higher US inflation. The US dollar bear market is likely to gain momentum, as the ballooning budget deficit weighs on the greenback.

The 2020 US general elections ended on 6 January 2021 with a Democratic sweep of two critical Georgia Senate seats, capping what has been a tumultuous election season. While the United States waited for the final results in Georgia, an angry mob of pro-Trump protesters stormed the US Capitol building in a futile attempt to disrupt the largely ceremonial certification by Congress of Biden’s hard-fought victory. The stunning developments on Capitol Hill will not change the significance of the Georgia election, which will have far-reaching implications for Biden’s policy agenda and financial markets going forward. The Trump presidency officially ends at noon on 20 January, allowing Biden and the Democrats in control of both houses of Congress to begin pursuing their policy agenda.

Prospects of a ‘Blue wave’ led cyclical assets to outperform due to prospects of a large fiscal package and inflation pick-up. The S&P 500 index opened strongly on 6 January but moderated somewhat following the occupation of Capitol Hill and closed the day up 0.6%. US Treasuries sold off, with ten-year US Treasury yield up 8 bp to 1.04%, above the 1.00% threshold for the first time since mid-March. Reflation expectations also led the US yield curve to steepen. The Dollar index was up 0.1% on the day.

We examine political, policy and investment implications from the Georgia election, which resulted in a Democratic sweep of the US Senate, giving Democrats full control of government until at least the next round of Congressional elections in two years.