Georgia Elections: Weaker Dollar And Tsys In Dem Sweep

 

Sell-side analyst consensus appears to be for the Republicans to win at least

one of the two special Georgia Senate elections, which are being held today.

* A Democratic sweep of both seats and thus control of the White House and

  Congress is seen as the ‘risk scenario’ (despite now being a roughly 50/50

  proposition per betting markets) and thus not viewed as fully priced in, and

  could usher in some major market moves at least initially. Though everyone

  seems to acknowledge the risk that final results may be elusive for a few

  days.

* Broad consensus is that Tsy yields would knee-jerk higher with the USD

  weakening in a Dem sweep scenario, as more fiscal stimulus is priced, but

  opinions diverge slightly on the medium-term outlook.

* With no particular outcome fully priced, a Republican win in either election

  is also seen as entailing market movement though more modest, potentially a

  retracement lower in Tsy yields and a stronger dollar (at least initially).

 

* TD: Sees Dem sweep leading to a bear steepening in the curve w 10Y Tsys going

  above 1%. Breakevens can rise a bit further as more fiscal stimulus should

  translate into higher inflation risk premium. USD could see further downside

  as “odds of another Covid relief package will outweigh downside associated

  with a potentially more ambitious Biden agenda”. If Republicans win at least 

one seat, it would lead to a small bull flattening move, w 10s moving back to

80-85bps, with the decline led by breakevens – but still would not be enough

to prevent ongoing negative USD trend.

* 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.

 

* BMO FICC thinks that in a Dem sweep, initial response would be upside for

  risk assets, with higher inflation expectations. But “the degree to which

  this translates to higher nominal yields presents a central debate for Q1.

  Building inflation expectations facing off against the potential for the FOMC

  to deliver a WAM extension is a recipe for lower real yields if nothing

  else.” First target for 10s is 98.4bps and then 1%, but, all in all fiscal

  aid repricing will not be sufficient for more than a 15bps repricing in 10s.

  30s could hit 1.80% and breakevens could move through 205bps.

* In Republican win, would see bull flattening in Tsys with downside in risk

  assets (all within ranges).

* Citi sees a Dem Sweep as potentially bringing another $500bn to the existing

  $900bn package and “add to reflation themes, at least for UTs.” Their “bias”

  is for the Republicans to win at least one seat however, and if this happens

  “this could see a tactical bid back into USD. But a blue wave sweep still

  carries a more medium term risk to the fundamentally bearish USD outlook in

  that this may ultimately see looser fiscal spending … at a time when the

  Fed is ready to taper its QE program by September 2021. This could translate

  to higher US real yields and strengthen USD.”

* They also note further potential for widening of the UST/Bund spread, given European lockdowns and ECB policy.