July 12, 2024

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Dow rises to new highs, but tech stocks lag as ‘reflation trade’ grips Wall Street after Democrats flip Senate seat

5 min read
Dow rises to new highs, but tech stocks lag as ‘reflation trade’ grips Wall Street after Democrats flip Senate seat
Dow rises to new highs, but tech stocks lag as ‘reflation trade’ grips Wall Street after Democrats flip Senate seat

U.S. stocks roared higher Wednesday, after Democrats scored at least one U.S. Senate seat in run-off elections in Georgia Tuesday, bringing the prospect of more government spending to boost the economic recovery, as well as regulation and higher corporate taxes.

How are stock benchmarks performing?
  • The Dow Jones Industrial Average
    DJIA
    scored fresh intraday highs, up 513 points, 1.7%, to trade near 30,904

  • The S&P 500 index
    SPX
    gained about 43 points, 1.2%, to trade near 3,770

  • The Nasdaq Composite index
    COMP
    was 41 points higher, up 0.3% near 12,860

  • The small-cap Russell 2000
    RUT
    gained 3.1% to about 2,041.

On Tuesday, stocks finished higher:

  • The Dow rose 167.71 points, or 0.6%, to 30,391.60

  • The S&P 500 added 26.21 points, or 0.7%, to 3,726.86

  • The Nasdaq Composite Index gained 120.51 points, or 1%, to trade at 12,818.96.

  • The Russell 2000 index
    RUT
     rose 1.8%.

What’s driving the market?

Politics was dictating trading action Wednesday after two key runoff elections for U.S. Senate seats in Georgia roiled parts of the market. Democrats were one step closer to control of both houses of Congress, improving chances that President-elect Joe Biden may be able to implement his legislative agenda.

Democrat Raphael Warnock defeated incumbent Republican Kelly Loeffler for one U.S. Senate seat and Democrat Jon Ossoff held a narrow lead over Republican Sen. David Perdue in the other race, according to the Associated Press.

A Democratic sweep of both seats in Georgia would give the party control of the Senate as Vice President—elect Kamala Harris would cast tiebreaking votes as the chamber’s president.

Technology stocks
XLK
gained, but less than value-oriented stocks, on expectations that a Democrat-controlled Congress would lead to higher taxes and tighter regulations of internet based businesses.

U.S. bond yields were also rising, weighing on the broader market, as fixed-income investors wager that a “Blue Wave” in Washington would increase government spending to combat COVID-19’s impact on the economy.

Tech stocks have roared higher in the past year partly because the low interest rate environment that helps justify owning pricier stocks that don’t pay rich dividends, but the 10-year Treasury note early Wednesday climbed over 1%, near its highest since March.

Still, some of the pessimism over the sector may be misplaced, said Paul Nolte, portfolio manager at Kingsview Investment Management. “If technology’s doing really well, we’re worried about the virus. If technology is not doing well, we’re more excited about re-opening,” Nolte said in an interview. “Today small-cap stocks, international stocks, even the yield curve is indicating more economic growth.”

“We’re expecting more of a reflationary trade in general,” Nolte said, “with growth taking a back seat to everything else. The fourth quarter was a taste of that and I think that will continue in fits and starts. We do expect a back-and-forth as we figure out how the economy opens and how much fiscal stimulus actually helps.”

The balance of power in the Senate is now in Democrats’ favor, “which leads naturally to the assumption that there will be another slug of fiscal stimulus to come early this year,” wrote Aegon Asset Management’s fixed-income manager Nick Chatters in a Wednesday note.

But it’s important to keep some perspective on bond yields, Chatters added, noting that the central bank will likely help keep yields in check.

“Whilst it is interesting to talk about fiscal stimulus, and this is important for growth, the main driver of government yields remains the policy rate,” Chatters said. “The channel to higher policy rates is via employment and inflation in the US, and this channel has long and uncertain lags. So, for treasuries, this is important, but not as important as the Fed.”

Bank stocks
XLF
were rising Wednesday as the yield curve, the spread between short-term bonds and their longer-term counterparts, was widening , a move that tends to be good for the business models of financial institutions.

Reports out Wednesday morning gave a grimmer view of the U.S. economy than analysts had expected. The Automatic Data Processing report on private-sector employment showed the first drop in jobs since April. Private-sector jobs fell by 123,000, ahead of the more closely followed Friday employment report from the Labor Department.

Meanwhile, the U.S. IHS Market service sector purchasing managers index for December fell to 54.8 in December, down from 58.4 in November, signaling a slower expansion amid a surge in coronavirus cases. However, factory orders rose for a seventh month.

On the coronavirus front, the U.S. counted at least 238,763 new cases on Tuesday, and at least 3,648 people died, according to a New York Times tracker. In the last week, the U.S. has averaged 219,650 cases a day.

Minutes of the Federal Reserve’s last meeting, which may give some insight into monetary policy, are due to be released at 2 p.m. ET.

See also: Here’s what a ‘blue wave’ forming in Washington means for markets

Which companies are in focus?
  • Shares of JPMorgan Chase &Co.
    JPM
    were nearly 5% higher as investors bet on a steeper yield curve. Shares of Bank of America Corp
    BAC.
    gained 7.2%.

  • Moderna Inc.
    MRNA
    shares climbed 4.4% after a European regulator approved its COVID-19 vaccine.

  • Tech giants lost ground: Amazon.com Inc.
    AMZN
    shares were down 1.1%, Facebook Inc.
    FB
    shares lost 1.4%, and Alphabet Inc.
    GOOG
    shares fell 1.6%.

  • Clean-energy companies like SolarEdge Technologies Inc.
    SEDG
    and TPI Composites Inc.,
    TPIC
    which makes wind-power parts, also surged.

  • Tesla Inc.
    TSLA
    shares were more than 3% higher, near $760, as Wall Street analysts remained divided over whether the company’s price target should be closer to $800 or $200.

Read: Here’s what a ‘blue wave’ forming in Washington means for markets

What are other markets doing?
  • The 10-year Treasury note
    BX:TMUBMUSD10Y
    surged above 1% for the first time since March, up about 10 basis points, as traders bet on stronger inflation and more debt issuance, both of which would erode the value of outstanding bonds. Bond yields rise as prices fall.

  • Oil futures were higher Wednesday, after Saudi Arabia surprised the market by cutting production. Crude for February delivery
    CLG21
    was up 0.6% to $50.23.

  • Gold futures
    GC00
    were off 2.3% at $1,909.20 as bond yields gained.

  • The pan-European Stoxx 600 Europe index
    XX:SXXP
    gained 1.6%, while London’s FTSE 100
    UK:UKX
    surged 3.7% after Moderna’s coronavirus vaccine got the green light from a European regulator.

  • In Asia, Hong Kong’s Hang Seng Index
    HK:HSI
      rose 0.2%, while the Shanghai Composite
    CN:SHCOMP
     gained 0.6% and Japan’s Nikkei 225
    JP:NIK
     fell 0.4%.

  • The ICE U.S. Dollar Index
    DXY
     a measure of the U.S. currency against a basket of six major rivals, gained 0.3%.

Read next: U.S. bond market could face ‘taper tantrum’ risk after Georgia Senate runoffs, says Jefferies

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