Date: 06 January 2021
Author(s): Naomi Rovnick, Colby Smith, and Hudson Lockett
Source: Financial Times
On Tuesday US equities rebounded at the back of a sharp sell-off on the first trading day of the new year 2021 as investors observed run-off Senate elections in Georgia that could determine the course of the dollar, fiscal stimulus and US tax policy.
One day after Wall Street suffered its worst trading day since October, the benchmark S&P 500 closed at 0.7 per cent higher, while tech-focused Nasdaq Composite index gained 1 per cent.
As the number of Americans in hospital with coronavirus hit a new peak, the Cboe’s Vix index which measures the expected volatility of the S&P 500 over the next 30 days rose to as high as 28.6, which was above its long-run average of about 20.
Head of US equity strategy at investment bank UBS, Keith Parker, said: “Equities hate uncertainty, which is why volatility spikes into these big risk events.” He has also said that stock markets would likely be trading nervously until the Georgia result was called on Wednesday.
If the Democrats win both seats in the Georgia run-off, the party will regain the reins of the Senate, enabling it to have control of both cambers of Congress as well as the White House.
Analysts at Goldman Sachs projected this so-called blue sweep would enable the Democrats to add $600 billion of stimulus spending to the $900 billion that had already been agreed by lawmakers in late 2020. There are, however, also fear from some investors that Democratic control of both houses could lead to higher taxes and in turn, lower earnings for US companies.
Randeep Somel, portfolio manager at M&G Investments said that “If the Republicans keep the Senate, that’s a check on everything” Democrat president-elect Joe Biden campaigned for. He added that a Democrat sweep was likely to mean increases in corporate taxation, “which when you are trying to get the economy into a period of recovery is not really ideal”.
Measured against a handful of other currencies, the dollar fell 0.4 per cent, staying at its lowest level since April 2018. The unpredictability on equity markets also helped buff the appeal of US government debt. The 10-year Treasury bond yield—which moves in contrary to its price—edged up 0.03 percentage points to 0.95 per cent.
In Europe, London’s FTSE 100 closed up 0.6 per cent but other major stock exchanges in the region sank. The broader Stoxx Europe 600 index dipped 0.2 per cent while Germany’s Xetra Dax dropped 0.6 per cent and the CAC in France fell 0.4 per cent.
The declines on the continent came after UK prime minister Boris Johnson ordered its third national lockdown for England on Monday, and Germany extended its lockdown for a further three weeks.
Fund managers on the other hand, focused on Asia’s bright spots. China’s CSI 300, which tracks the largest shares on the Shanghai and Shenzhen stock exchanges, closed 1.9 per cent higher. South Korea’s Kospi 200 closed 1.5 per cent higher; New Zealand’s NZX 50 finished off with a 2.1 per cent increase; and the Hang Seng index in Hong Kong added 0.6 per cent. China’s onshore-traded renminbi was 0.1 per cent stronger at RMB6.4559 to the dollar a day after it crossed the 6.5 per greenback threshold for the first time in more than two years.
China’s currency, the RMB, is tightly controlled by the nation’s central bank. Chief economist at London-based hedge fund Toscafund, Savvas Savouri, said that the People’s Bank of China’s decision to permit the renminbi to rise was “a signal that they don’t trust their traditional export markets in the west to stay healthy, so let’s focus on domestic consumption”.
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