The implications are likely to be short-term, if any that is
Going by the action yesterday, the market appears to be a little nervous and anxious to start the new year - not helped by the constant barrage of negative virus news that is offsetting most of the vaccine optimism from the latter stages of last year.
The emphasis of the Georgia runoffs only adds to the uncertainty in the opening week but I would argue that any major implications from the results are to be short-lived.
I shared some thoughts about that earlier in the day:
As for the trading day ahead, the Georgia runoffs present the most considerable risk factor for the market but I would argue it is largely a short-term excuse for real money flows to pick a side of the coin to start the new year.There is the distinct possibility that the results won't be known for days but the market is always quick to pick up on the finer details - similar to the November presidential election - so don't expect the market to be blinded for too long.Even more so in the case of a Republican comfortably leading in either of the two races.In any case, even a Democratic sweep doesn't do much to change the overall narrative in the market if you really want to drill down into the nitty gritty. However, the market could still use all of that as an excuse to put on some early positioning to start the year.A risk rally after a 'blue wave'? It must be to do with better stimulus prospects and more spending set to follow. A risk selloff after a 'blue wave'? It must be to do with concerns about corporate taxes that could follow (even if it is extremely unlikely to pass).A risk rally after Republicans hold the Senate? It must be to do with the status quo from last year being maintained. A risk selloff after Republicans hold the Senate? It must be to do with disappointment on a smoother legislation passage in Congress.If anything, the big picture narrative is more key regardless of the results and that is largely to do with the Fed and the printing press. As long as that remains as it is, the market can always rely on the same tailwind it got from trading last year to translate to this year.
Regardless of the results, the market will pick a narrative to support the flow movement to kick start the new year. And as pointed out above, it can go any which way really.
As such, the main focus shouldn't be on the results itself but more so on what will this do to change the market landscape in the bigger picture this year.
In general, I would argue that it shouldn't change things all too much. The key risk to the market is still Fed policy and that is going to keep as it is at least through 1H 2021 and perhaps longer if the economic recovery and vaccine rollout doesn't go according to plan.
As such, the Georgia runoffs are likely to just have short-term implications to the market, if there is even any. A Democratic sweep may present some concerns about higher corporate taxes but that is unlikely to pan out given such a slim "majority".
On the flip side, one can argue that smoother legislation passage in Congress and better stimulus prospects could underpin risk trades even more.
In the opposite outcome i.e. Republicans hold the Senate, the status quo from the end of last year remains and the focus keeps on the Fed once again.
When viewing the dollar, the risk is pretty much asymmetric and that isn't a convincing outlook for a major rally in the greenback that will change the big picture - despite a possible correction that could follow as we get things started here in the new year.