Stimulus Hopes Lift Markets Past Political Turmoil as Yields Rise

On a day when the nation's capital was consumed with impeachment proceedings, traders around the world had their eyes fixed on something else entirely: the prospect of a $2 trillion infusion of federal spending. The signal was clear enough in the futures markets. Wall Street was pointing higher. In Tokyo, the Nikkei had climbed to its highest level in three decades—a milestone not reached since August 1990. European indices were up 0.5%, brushing aside the political noise that might ordinarily have given investors pause, including the looming possibility of yet another Italian government collapse.

What was driving this optimism was the expectation that President-elect Joe Biden would unveil a massive COVID-19 relief package in the coming hours. The sheer scale of the proposal—two trillion dollars—was enough to override concerns about impeachment, geopolitical risk, and the mounting toll of the pandemic itself. Investors were betting that stimulus would outweigh everything else on the table. The bond markets, however, were telling a different story. The yield on the 10-year Treasury rose two basis points to 1.11%, a signal that traders were beginning to price in the inflationary consequences of such enormous new borrowing. When the government borrows that much money that quickly, it pushes up the cost of capital across the entire economy—a concern that would linger as long as the spending remained on the horizon.

Asia had already delivered some encouraging economic signals overnight. Chinese exports in December had grown more than expected, suggesting that global demand remained solid despite the pandemic. Japanese machinery orders had risen for a second consecutive month. These data points reinforced the narrative that the world economy, while battered, was not collapsing. Yet the most dramatic move came in Chinese technology stocks. Alibaba, Tencent, and Baidu all surged after reports that the Trump administration had abandoned plans to extend its investment ban to their shares. These three companies alone represent more than $1.3 trillion in market value and account for more than 10 percent of the widely-followed MSCI emerging market index. For investors who had been bracing for further restrictions on Chinese tech, the news was a relief. "I think the market is relieved," said Vivian Lin Thurston, a Chinese equity portfolio manager at William Blair Investment Management. But she added a note of caution: the uncertainty was unlikely to disappear entirely until the new administration's approach to China became clearer.

Commodity markets were less enthusiastic. Oil futures edged lower as fresh waves of coronavirus cases raised the specter of additional lockdowns and reduced energy consumption. Brent crude fell 0.5% to $55.75 a barrel, while U.S. crude settled at $52.70. The global death toll from COVID-19 was approaching 2 million, and new variants were emerging—a Brazilian strain had been identified, China had recorded its first death since April, and countries from South Africa to Scotland were tightening restrictions. Gold, which typically benefits when yields are low and inflation fears mount, had fallen 0.2% to $1,840 an ounce, well below the two-month peak of $1,959 it had reached just a week earlier. The metal was suffering as Treasury yields climbed.

The day's real test was still to come. Biden was scheduled to lay out his economic plans later that Thursday, and Federal Reserve Chair Jerome Powell was also set to speak. Either announcement could reignite the bond market's selling pressure. The critical question hanging over global markets, according to Frank Benzimra, head of Asia equity strategy at Societe Generale in Hong Kong, was when the Federal Reserve would begin to reduce its massive bond-buying program—a process known as tapering. "This is where you can get some concern," Benzimra said, though he added that such a move still seemed premature. Currency markets were adopting a wait-and-see posture. The dollar rose 0.2% to 104.12 yen as investors remained short the currency, uncertain whether the eventual tapering of Fed support might limit the greenback's decline. The Australian and New Zealand dollars, both sensitive to global growth expectations, firmed to $0.7761 and $0.7203 respectively. The euro showed modest losses at $1.2125. Even Italy's political instability—the country was edging toward fresh elections that could produce its 132nd government in 160 years—barely registered as a concern. For now, the market's attention remained fixed on Washington and the size of the stimulus check that was about to arrive.