Familiar Feeling

Familiar Feeling

It was a familiar feeling for market participants: Nothing mattered until a contentious election was decided.

With rates, equities, and the dollar all staring down the Georgia runoffs, investors and traders spent most of Tuesday idly musing about the composition of the US Senate and the implications for stimulus, the economy, and Joe Biden’s agenda more broadly.

There were some notables in the last session prior to the vote. Long-end yields, for example, were cheaper by 4bps out the curve. The 5s30s steepened to a new four-year wide.

The bear-steepening move came amid heavy high-grade supply, including several multi-tranche deals.

At the same time, 10-year breakevens continued their trek higher, nearing 2.05% on the heels of Monday’s headline-grabbing breach of 200bps. That’s a key narrative for markets and the results of the Georgia vote are seen either cementing the move or else cutting it off at the knees.

Meanwhile, Saudi Arabia decided to unilaterally cut output next month, in what Russia called a “gift” for the oil market. That pushed WTI beyond $50 for the the first time in almost a year. The figure (below) is just a reminder that these two things (breakevens and oil) tend to go hand in hand.

Again, the viability of the reflation narrative hangs at least partially on the outcome of the Georgia vote. The balance of power in the Senate will determine whether Biden’s agenda is obstructed wholeheartedly, or merely hampered by a slim majority and a reluctance on the part of centrist Democrats to lean too far left.

A side note (or a key issue, depending on your income bracket) is that a Democratic win would keep hopes alive for higher stimulus checks, while a GOP hold would probably slam that door shut.

The dollar debate (as discussed briefly here early Tuesday) is still one of the more vexing quandaries when it comes to gaming out possible post-Georgia scenarios. There are both bullish and bearish arguments for the greenback tied to every conceivable electoral outcome. In short: You can argue either side of the coin, and from multiple different angles.

On Tuesday, the greenback slumped further. Bloomberg’s gauge fell 0.5%, while gold rose to a two-month high. Crude’s rally and the ongoing rise in breakevens are adding further downward pressure to the dollar.

As much as people like to fret about the “demise” of the greenback, it’s a softer dollar (and, relatedly, falling US real yields) that helps facilitate gains in risk assets. So, don’t forget to what you owe your good fortune.

Anyway, all eyes turned to Georgia and, within hours, they’ll turn to D.C., where lawmakers have been encouraged to use underground tunnels this week, due to expected protests as Congress meets to debate whether the country is still a democracy or whether it’s time to try something different after more than two centuries.


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