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Delayed blue wave causes chaos in the Capitol

But control of the Senate does not give Democrats free rein


Kirsten Hastings

Like millions around the world, I sat open-mouthed as I watched live coverage of the scenes in Washington DC on 6 January.

Hundreds, if not thousands, of Trump supporters descended on the Capitol Building to disrupt the confirmation of Joe Biden as the 46th president of the United States.

As of this morning, there are four confirmed deaths and significant damage to a historic building.

Ever the journalist, however, as soon as I was able to get my head around what was happening, my first thought was ‘well, there goes my news cycle’.

If I have learned anything in this job, it is that I will get comments from some PRs about pretty much everything and anything – whether they are relevant to my publication or not.

Well, 2021 decided to prove me wrong.

It may be that there is genuinely nothing to say – but that hasn’t really stopped some people in the past.

Or it may be that people are still working out what impact, if any, the riots will have.

Either way – my inbox has been very quiet this morning.

But that wasn’t the case yesterday, ahead of the senate election results and before anarchy arrived in the nation’s capital.

Pre-election result coverage

The Georgia races were fairly close.

Democrat Raphael Warnock beat Kelly Loeffler with 50.8% of the vote, while Jon Ossoff took 50.4% against David Perdue.

It means the Senate sits 50/50 Republicans and Democrats, with vice president-elect Kamala Harris holding the deciding vote.

Matthew Cady, investment strategist at Brooks Macdonald, predicted that Democrat control of the Senate could be a “double-edged sword” for markets.

“On the one hand it could make an additional and larger fiscal stimulus in Q1 more of a possibility and with it a greater emphasis on infrastructure spending, which will provide greater support for markets as the US continues to face headwinds from the covid-19 pandemic.

“On the other hand, further out it could also raise the chances of tax rises, tougher regulation and other less market-positive reforms.”

Cady expects that, even after taking the Senate, “there will continue to be some political and practical limitations to the scope of any Democrat policy reform”.

“First, the current margins of control in both houses in Congress are likely small enough, especially given a number of more moderate members in both parties, to contain the chances of very radical policy proposals.

“Second, the covid-19 pandemic will continue to dominate political priorities and tax rises for example would be considered unlikely whilst the US economy is still judged to be in recovery-mode.

“Finally, there is the calendar of the US political cycle to consider; with mid-term elections less than two years away in November 2022, the Democrats will be wary of risking unpopular policy changes for fear of losing control of the Senate especially should they have just won it,” he added.

Potential flies in the ointment

Commenting ahead of the result and riot; James Athey, investment director at Aberdeen Standard Investments, said he expects the belated blue wave will “likely pressure treasury yields higher, particularly in longer tenors, as yields will have to reflect higher growth expectations and greater supply of treasuries, all else equal”.

“The result also adds further momentum to the reflation theme that permeated US markets for much of the second half of 2020. With the potential hurdle of divided Congress now largely removed, the possibility of greater fiscal stimulus is being perceived as another upward force on US inflation.

“When taken in the context of a Federal Reserve that is seemingly willing to embrace the new-found latitude afforded to it by the move to a flexible inflation target, we feel there is scope for the inflation market to continue to anticipate additional pricing pressures in the medium to long term.

“There are, however, a few potential flies in the soothing ointment. The first concerns some of the less market-friendly Democrat policies which might now be a realistic prospect. Higher corporate, capital gains and income taxes will all be seen as potential negatives for the equity market as will a more onerous regulatory environment.

“More robust antitrust regulation and enforcement have the potential to suck the wind out of Big Tech’s sails at a time where valuations there already look increasingly hard to justify.

“Coupled with the possibility of a more prolonged rotation out of so-called covid winners into the covid losers driven by the higher growth expectations which follow this electoral result, and it might not be such a perfect environment for the tech behemoths.

“The second is the US dollar. Shorting the Greenback is one of the market’s biggest consensus trades for 2021. A positive US-specific growth boost coupled with rising US yields isn’t normally a combination we would expect to see driving the currency lower. Should the dollar do an about-face it will provide some welcome relief to the world’s exporters, but it might not be so welcome in financial markets which often associate a rising dollar with periods of risk off. That association is very often a self-fulfilling prophecy,” Athey added.

Unchanged forecast

Independent forecasting and consultancy firm Capital Economics does not believe that the blue victory is a gamechanger.

Michael Pearce, senior US economist, wrote on 6 January that Biden “will have a much easier time confirming his picks for cabinet positions” but warned his major legislative priorities “are still unlikely to become a reality”.

Most legislation of consequence requires 60 votes in the Senate to avoid a filibuster.

The slim majority the Democrats hold in the House could also pose problems, Pearce said.

As could the divide between the more progressive members of the House versus the more moderate Senate.

“All that said, Democrats winning back the Senate does have some immediate implications.

“It will allow Democrats to confirm Biden’s cabinet picks more easily, though almost all of his key appointments have been relatively safe picks that looked set to garner widespread support in the Senate.

“Through the Congressional Review Act, Democrats should also be able to reverse Trump’s recent deregulatory actions, including a range of rules covering the energy and financial sectors.

“It will also make it easier for Biden to confirm a new pick for the vacant Fed board seat, as well as potentially confirming a replacement for Fed Chair Jerome Powell should he choose to replace him when his term ends in early 2022.”