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U.S. tech stocks set to skid as bond yields drive higher after Democrats flip Senate seat

Stock-index futures for the Nasdaq-100 were sharply lower Wednesday morning, auguring badly for technology stocks after Democrats scored at least one U.S. Senate seat in run-off elections in Georgia Tuesday, bringing the possibility of regulation and higher corporate taxes.

How stock benchmarks are performing?

On Tuesday, stocks finished higher:

  • The Dow
    SPX,
    +0.71%

    rose 167.71 points, or 0.6%, to 30,391.60

  • The S&P 500
    SPX,
    +0.71%

    added 26.21 points, or 0.7%, to 3,726.86

  • The Nasdaq Composite Index
    COMP,
    +0.95%

    gained 120.51 points, or 1%, to trade at 12,818.96.

  • The Russell 2000 index
    RUT,
    +1.71%

     rose 1.8%.

What’s driving the market?

Politics were set to dictate trading action on Wall Street after two key runoff elections for U.S. Senate seats in Georgia Tuesday looked set to roil parts of the market, as Democrats moved one step closer to control of both houses of Congress, improving the chances of President-elect Joe Biden being 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 runoff, according to the Associated Press.

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

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Futures contracts tied to the Nasdaq-100 index are dropping early Wednesday on expectations that a Democrat-controlled Congress would lead to higher taxes and tighter regulations on technology giants.

On top of that, U.S. bond yields are surging, also weighing on tech stocks and the broader market, as fixed-income investors wager that a Democratic-controlled would likely to increase government spending to combat COVID-19’s impact on the economy, likely pushing out more debt and dragging down the value of existing Treasurys.

Tech stocks have enjoyed gains in the past year partly because of the low interest rates environment that has both made it easier for individual investors to justify owning pricey, growth stocks that don’t pay rich dividends against meager bond yields. But the 10-year Treasury note early Wednesday was yielding over 1%, around its highest level since March.

“The election tips the balance of the senate in favour of the Democrats, if we include the VP, 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.

That said, he did offer a note to temper perspectives on bond yield moves.

“This is clearly bearish for government bonds; however, we need to ask what the driver of yields is over the medium term?” he said.  

“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. 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,” suggesting that the central bank would likely hem in rates moves through asset purchases as the economy recovers from the pandemic.

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Bank stocks on the flip side were rising 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.

Looking ahead, markets await a private-sector reading of U.S. employment in December from Automatic Data Processing at 8:15 a.m. Eastern Time, ahead of the more closely followed Friday jobs report from the Labor Department.

Minutes of the Federal Reserve’s last meeting, which will be pored over for how the central bank communicates its view of the economic outlook, is due to be released at 2 p.m.

A flash composite reading of U.S. purchasing managers indexes are due at 9:45 a.m., while a report on factory orders will be released at 10 a.m.

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.

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