Democrats Win Power, Capitol Hill Stormed

01/07/2021 10:15 am EST

Focus: GLOBAL

Adam Button

Co-Owner and Managing Director, ForexLive.com

The Democrats turned out in numbers on Tuesday and picked up two Senate seats in Georgia to flip the chamber and pave the way for a much-stronger Democratic agenda for the next two years, says Adam Button of ForexLive.com.

The somewhat-surprising outcome propelled Treasury yields above crucial technical levels and gave a boost to the dollar, but markets were riled when protestors stormed the US Capitol.

Democrats pulling into a 50-50 tie in the Senate effectively gives them control because the Vice President is the tie-breaking vote. In comments Wednesday, Democratic Senate leader Schumer confirmed that one of the first priorities will be $2,000 stimulus cheques. That highlights that deficits will not be a priority for the US government any time soon.

That was reflected in 10-year yields, which rose 8 bps to 1.035% in a break of the 1% threshold for the first time since the start of the pandemic. That break led to some initial support for the dollar, but it later faded.

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Equities initially sold off before heading much higher. High spending from the Democrats ensures a faster recovery and stronger economic growth in the next two years. Fears of a corporate tax hike are overblown with far too many red Democrats in both chambers likely to oppose it.

That almost sets up a dream scenario for equities with high spending and little restraint. Some pockets like tech face more scrutiny but global equities will cheer the news. More broadly, this is likely to further usher in an era of high government spending globally, something that should underpin precious metals and crypto.

Mixed into the market reaction was serious concern after protestors stormed the US Capitol, sparking unbelievable scenes at the seat of the country's government. Shots were fired and the scene remains volatile in what might be a preview of what's to come; or come be the last gasp of Trumpism.

Markets shifted into a more-cautious stance after the scenes, but we expect the scene to calm in short order and positive trends restored. If anything, governments facing instability are even more likely to spend heavily.

Learn more about Adam Button by visiting ForexLive.com.

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