What to expect from the markets after a volatile week in the US


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A week in American politics like no other: a Democrat victory in Georgia's Senate runoff election and a siege on the US Capitol building. The markets certainly didn't expect it, but what should we expect from the markets?

"The market had a one-way bet that the Republicans were going to win both seats in the Georgia runoff... but as we found out that didn't happen, and that changes a lot," says Deep Data Analytics CEO Mathan Somasundaram.

But the changes haven't been immediate. So far, markets have been a lot less volatile than the political backdrop.

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"Expectation around more stimulus with Democrats taking the lead is adding on to the positive wave and investor sentiments remain upbeat," says Hina Chowdhary, director of research at Kalkine.

"Closer to home and post yesterday's correction to an extent, tech players seem to be back in the game."

Expect to see more of a response over the mid and long term with upward pressure on inflation and bond yields thanks to Biden's bottom-up stimulus plan.

"The blue wave will raise taxes and regulation as well as government handouts to main street," says Somasundaram.

He expects rising input costs, a weak US dollar, rising input costs, supply-side risk and consumer spending after handouts will push US inflation above 2-3% in the next six months, which will spell bad news for tech, healthcare, financials and the energy sector.

"It's basically a reflation trade. Anything that benefits from rising prices is going to do well."

Kerry Craig, Global Market Strategist at J.P. Morgan Asset Management, says: "Markets will reprice for large stimulus measures under the new administration which should favour cyclical sectors of the equity market and stoke growth and inflation expectations, leading to a rise in bond yields."

Asia also stands to benefit.

"For Asian markets, the continued decline in the U.S. dollar should funnel fund flows into emerging market equities and debt," he says.

"Meanwhile, the yields on emerging market debt still stack up well against what is available in developed markets. Currency movements will have to be monitored, however, and stronger currencies are not always welcome when economies are trying to drag themselves up, particularly relevant for the Australian dollar."

On the trade front, this week's violence in Washington DC may further strengthen the resolve of the Biden administration to re-assert the need for American leadership on the world stage. On the other hand, the Biden administration will be being careful not to stoke domestic distaste for globalisation.

"While markets were spooked at the Democrats taking the Senate for a clean sweep of House, Senate and White House, the violent protests egged on by President Trump have illustrated the need for stability under the new President Biden and a globally engaged United States," says Tim Harcourt, an economist at the University of New South Wales Business School.

"It's likely however that the Biden administration will still be tough in China trade-wise and will be wary of blue-collar skepticism of international trade and climate change."

Biden has called for a Summit of Democracies to counter China, which presumably won't do much to reverse the trade restrictions Beijing has placed on Australian exports.

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David Thornton was a journalist at Money from September 2019 to November 2021. He previously worked at Your Money, covering market news as producer of Trading Day Live. Before that, he covered business and finance news at The Constant Investor. David holds a Masters of International Relations from the University of Melbourne.