Watch out for changes in US policy

Two runoff elections this week will decide which party – Republican or Democrat – will win control of the Senate. The results are important for markets.

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  1. Charles Stanley

This is a big week for US politics and the world economy. Tomorrow the polls close at 7pm in Georgia where both Senate seats are being re-run. The two Republican Senators did not creep past the 50% winning post in close contests last November, so they have to run off with just two candidates in each election to find a majority winner.

Were the Republicans to lose both seats the Democrats would control the Senate on the casting vote of their Vice President, allowing proposals for much higher spending and tax rises to pass in fraught votes. If there still is a Republican majority after the elections, a Republican Senate would block these proposals of President Biden.

On Wednesday, the Senate meets to ratify the Electoral College votes from the Presidential election. President elect Biden won the contest by 306 to 232 and has so far beaten off a series of court challenges to the validity of the returns in a number of close swing states. 11 Republican Senators intend to protest at the declared results, and to demand a 10-day audit of selected states election returns with a view to establishing whether there is any evidence to support the widespread Trump supporter allegations of voter fraud and false counting.

It seems likely the Senators will not have the votes to force the delay. Most expect Vice President elect Biden to be confirmed as the winner of the election. More relevant is what impact if any these moves will have on the electors of Georgia. Are there many disappointed Trump voters who will appreciate the last-ditch attempt to resurrect his campaign, or are there more angry Democrats who do not like such behaviour and see it as bad losers?

Income matters

The voters will probably be more affected by the issue of payments to most US workers as part of the new stimulus package agreed by Congress recently. The Democrats’ offer of $2000 each has been downgraded to $600 by the Republicans, against the advice of President Trump.

In the latest polls from Georgia the two Democrat candidates have edged ahead of the Republican incumbents by 1.2% and 1.8%, reversing the 1-2% lead the Republicans enjoyed briefly before Christmas. The Republicans are making it difficult for themselves by being split on the issue of President Trump's election, and by being against his bi partisan wish to give the voters the money. 

Markets may rise on either result in Georgia, on the grounds that restraint on President Biden would mean lower taxes which they like, whilst a Democrat clean sweep in the short term means a bigger fiscal boost. As long as the Fed keeps printing the money under the eagle eye and encouragement of Janet Yellen as Treasury Secretary, markets may remain in a forgiving mood. They are going to have to turn a blind eye to the pandemic, or to carry on looking through it on the grounds that it should pass this year with the benefit of vaccines to speed its demise. In due course were the Senate to go Democrat, markets would need to reappraise values with higher company tax levels and with a tougher attack on the sectors relying on fossil fuels.

The world is experiencing a further surge in CV 19 cases, especially in Europe and the USA. The discovery of a faster spreading variant in the UK is likely to affect many other countries as it finds its way abroad or transmutes in other places anyway. 

On both sides of the Atlantic there are more lockdowns, curfews and social distancing policies, hitting hospitality, leisure, travel and entertainment hard again, and interrupting shop retail. There are now 20 countries that have exceeded 50,000 cases per million or 5% infection rates for the total population. Most are in Europe and most are small countries, but the list does include the USA, as well as Belgium and the Czech Republic. Some of this may be down to more testing in these places than in many of the emerging world countries.  

The death rates have also risen. The top six countries are all European, led by San Marino and Belgium but also including Italy amongst the larger countries. Peru at seventh is the one non-European country in the top group. The Balkans have had a bad experience. Several countries that have followed tough lockdown policies have still suffered bad attacks in the second wave this winter.

A slow process

It is going to take time to produce enough vaccine and vaccinate enough people to allow significant relaxation of controls. The addition of the Astra Zeneca vaccine to the Pfizer one makes a big difference as it is cheaper and easier to produce and to distribute. It will not be in time to prevent another poor quarter to March in the parts of the world economy that rely on social contact. We can expect another three months of success for all those offering digital and virtual alternatives to meetings, entertainment and retail, and deeper scarring to the traditional businesses starved once again of customers and cash.

Investors want to be optimistic and will take comfort from the medical story and from the likely increases in stimulus in the USA as the change of government takes place. They need to be aware of the longer-term damage and the large structural changes to come, as the world embarks on serious decarbonisation, and seeks to remodel property and cities in the wake of the lockdown jolt to conventional patterns of work and play.

The pent-up savings of the many in the west who kept their jobs and had less opportunity to spend should fuel more recovery later this year, with bounce back in travel, entertainment and hospitality when permitted. There may not be the same easy return to five days in the City centre office, nor in returning to more shop purchases now so many people have found out how easy online is. Families and homeworkers are gaining much more access to online options and acquiring new laptops, mobiles and tablets to help them.

The EU has been struggling to catch up with the UK and USA over vaccines. It has now issued a marketing authorisation for the Pfizer product and is examining others, with a view to deciding on the Moderna version on January 12th, to be followed by Astra Zeneca. The Commission shows on its website a long term forecast of the main economies, suggesting that the EU 27, currently representing a little below 15% of world GDP, will fall to 9% by 2050, reflecting very rapid growth in India, a good performance by China, and faster growth in the USA than the EU over those three decades.

China has announced a licence for one of its experimental vaccines against CV 19. Sinopharm’s product is already being used in the Middle East, led by the UAE and will now be more widely distributed in China. The Chinese economy is poised for faster growth this year, putting behind it the pandemic effects which weighed on the early months of 2020. Asia generally continues with a less damaging experience of the pandemic than Europe or the Americas according to the published figures.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.


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