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Good morning, Bull Sheeters. All eyes are on Georgia. And that’s putting investors in a risk-off mood.
At 2 a.m. Atlanta time, Democrat Raphael Warnock was called as the winner of one of the two Georgia Senate seats up for grabs, and that sent Treasury yields and Chinese stocks soaring. Meanwhile, the dollar and tech-stock futures fell, and they continue to sink. The Ossoff-Perdue race is still too close to call, but the markets there too are pricing in a blue sweep. I explain the implications below.
But first, let’s check in on what’s moving the markets.
- The major Asia indexes are mixed in afternoon trading with the Shanghai Composite up 0.6%.
- President Trump signed an executive order establishing a ban on all U.S. transactions executed on a host of Chinese fintech payment platforms, including Ant Group’s popular Alipay, Tencent’s QQ Wallet and WeChat pay.
- The situation in Hong Kong has grown more tense after police arrested dozens, including an American lawyer, in the latest pro-democracy crackdown. The action triggered a strong rebuke from Antony Blinken, President-elect Joe Biden’s pick for Secretary of State.
- The European bourses are mixed in early trading with the Stoxx Europe 600 up 0.3% at the open.
- The Russians are calling Saudi Arabia’s surprise cut of crude production a “New Year’s present,” a move that sent Brent and WTI soaring on Monday. It also lifted energy stocks on both sides of the Atlantic.
- Staying with Russia… U.S. intelligence agencies named Russia as the “likely” culprit in the widespread hack on American businesses and U.S. government agencies, a rebuke of President Trump’s claims it was probably China.
- In a classic sell-the-news move, U.S. futures dipped once the Associated Press called the U.S. Senate race for Warnock, with Nasdaq futures falling the most.
- The Georgia vote has pushed the 10-year Treasury above 1% for the first time since the March markets collapse as investors bet the Democrats will take a razor-thin majority of the U.S. Senate.
- Gold is flat, but it’s had a strong start to the year, trading around $1,953/ounce.
- The dollar is sinking.
- Crude is up slightly after a stellar Tuesday which saw WTI crack $50/barrel, an 11-month high. Texan wildcatters can thank the Saudis for that.
- Bitcoin is up 10% in the past 24 hours, but trade remains incredibly volatile (even for a digital currency.)
Politics, and your portfolio
I was prepared to talk to you today about ETFs and your portfolio, but I’m going to switch gears to narrow in on Georgia as things are happening quickly there, and a little context is needed for what we may very likely see and hear at today’s opening bell.
As I type, it’s still too early to call the Ossoff-Perdue race. But the markets are pricing in how this one too will end up. As of 4:15 a.m., the Democrat challenger Ossoff had a greater than 16,000-vote lead. And, with each update on the vote count, stock futures are moving.
The Nasdaq has fallen all morning, now off 2.2%. Investors are nervous about tax policy and a new era of antitrust oversight on Big Tech.
The opposite story is playing out in small caps. Russell 2000 futures are climbing as investors bet one-party control will mean further stimulus spending and a big pledge to increase infrastructure spending. That’s good news for Main Street and for the American consumer, the engine of the U.S. economy.
The ripple effects of such spending, however, would mean more debt, a weaker dollar, a steeper yield curve on Treasurys (we’re already seeing that this morning), and an uptick in inflation. The i-word is the big one to watch. The expectation of higher prices could influence Fed policy (probably not in 2021, mind you) to review its benchmark rate.
If the Democrats were to sweep Georgia, you could bet you’ll be hearing a lot of chatter about the “Taper Tantrum 2.0.” A reminder: the Taper Tantrum happened in 2013 when then-Fed chief Ben Bernanke signaled the central bank would begin to “taper”—not pause, not abandon, but taper, or tap the brakes—its policy of quantitative easing. Stocks then tanked and bond yields soared. The whole panic (with a small p) was much ado about nothing. After the initial swoon, the markets climbed, the economy grew, employers continued to hire, and wages nudged up. It was a mere blip in the decade-long bull market, in other words.
That little history lesson is one to keep in mind as dawn breaks on Atlanta this morning.
Have a nice day, everyone. I’m off tomorrow and Friday; Rey Mashayekhi, whom investors adore, will take the keys… Until then, there’s more news below.
As always, you can write to [email protected] or reply to this email with suggestions and feedback.
Biden’s inauguration was good news for our world
Good morning. David Meyer here in Berlin, filling in for Alan.
I’m a South-African-British dual citizen living in Germany. So, while I’ve been saddened by the rancor that’s infected American politics over recent years, and while I naturally have personal opinions on the issues that divide the country, I’m not an American voter, and my family and I have no direct stake in the choices that American voters make.
Except when it comes to one particular issue: the climate emergency.
The world is heating up due to human actions, and there is strong scientific consensus that this will have terrible outcomes if not mitigated. We’re seeing them already, in the U.S., in Germany, in the U.K., in South Africa—everywhere. We all share this world, we are all suffering from its degradation, and we must all act to save it.
That responsibility lies with every country, but there’s no getting around the fact that the greatest onus to cut carbon emissions rests on the biggest emitters, namely China, the U.S., the EU, India and Russia. The fifth entry on that list is dragging its heels—and shame on the Putin regime for that. But China, the EU and India are all taking this challenge seriously, and it is of the utmost importance that the U.S., the second-biggest emitter, does the same.
Based on this, I can only applaud yesterday’s inauguration of President Joe Biden. I’d do the same for a Republican president who took the climate emergency seriously—on this side of the pond, it’s much less of a partisan issue, and I hope that will soon become true in the U.S. as well.
As soon as he took office, Biden was a whirlwind of climate-defending activity. Most importantly, he recommitted the U.S. to the Paris Agreement, which aims to keep global warming well below 2 degrees Celsius. The significance of this is enormous.
Before yesterday, countries producing half of all global carbon emissions had committed to carbon neutrality or net-zero emissions. “Today’s commitment by President Biden brings that figure to two-thirds,” said United Nations Secretary-General António Guterres as he welcomed the move.
But, Guterres warned, “there is a very long way to go. The climate crisis continues to worsen, and time is running out to limit temperature rise to 1.5 degrees Celsius and build more climate-resilient societies that help to protect the most vulnerable.”
I have no doubt that the U.S. will be rewarded for bringing its considerable heft to this fight, not only in terms of national security—climate change is a far more fundamental threat than terrorism—but also when it comes to international standing. The country will find it easier to achieve its foreign-policy aims when others see it as a partner rather than a holdout.
It should also go without saying that clean-energy investors will find the new administration’s policies rewarding. Solar stocks are on a tear, thanks to the prospect of more stimulus and subsidies, and the likely continuation of low interest rates that aid financing for new projects. Unsurprisingly, with a green-hued infrastructural push on the way, a BofA note this morning points out that fund managers are throwing money into energy and materials.
All in all, yesterday’s transition provides grounds for climate optimism around the world. But now there’s work to do. More news below.
Do government deficits matter?
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In support of political contributions
Most Americans don’t want CEOs involved in politics. A poll conducted last week by Golin and Ipsos found only 41% favored CEOs weighing in on disputed elections, and only 43% wanted them speaking out on impeachment. On the other hand, 74% say CEOs should call for unity and a peaceful transfer of power, and 57% believe it was appropriate for CEOs to speak out after the January 6 insurgency at the Capitol. That pretty well tracks with the way most CEOs and business groups have behaved since election day. They kept their powder dry until all legitimate avenues for disputing the election were exhausted, then came out strongly endorsing the election results and attacking efforts to undermine them. Relatively few have backed impeachment. (You can see the poll results here.)
But how about political contributions? That’s the question raised last week, as a host of companies—Marriott, AT&T, American Express, Best Buy, Cisco, Comcast, Dow and Amazon among them—suspended campaign contributions to members of Congress who challenged the election results. Another large group—Microsoft, Boeing, Blackrock, Coca-Cola, JP Morgan, Ford, GM, UPS, Goldman Sachs and Citigroup—temporarily halted all political contributions to members of both parties. (Quartz has a more comprehensive list of what companies did here.)
Some business leaders are even contemplating permanently shutting their political action committees and exiting the money game altogether. But absent a broader overhaul of campaign finance—which is unlikely anytime soon—I think that’s a mistake. Most big companies remain balanced players in the money game, dividing their dollars roughly equally between members of each party. Walmart, for instance, has kept its contributions at exactly 50-50. Their strategies have less to do with trying to influence outcomes, and more to do with assuring they have access to whoever wins.
The more important question for 2021 is how big business uses that access. There are a host of issues where business has the potential to help broker positive outcomes for the U.S. economy and society: economic stimulus, infrastructure, worker training, climate change. On each of these, business leaders occupy the center, and can help bring the parties together to solve urgent problems.
But on tax and regulatory issues, in particular, corporations will be playing defense. And they’ll be tempted to use what influence they can muster to seek tax breaks and regulatory exemptions that aren’t in the broader public interest. That’s where the commitment to stakeholder capitalism will be tested. The nation desperately needs business involved in government. But business, now more than ever, needs to use its influence to focus on solving long-term challenges.