HomeThe Risk to Markets at the Start of 2021

The Risk to Markets at the Start of 2021

Believe it or not, but the U.S. elections are not over yet. Yes, we do know the name of the next U.S. President, but we still do not know the full componence of the Senate. 

Today we have the runoff of the two Senate seats in Georgia, and the outcome is key in the battle between Democrats and Republicans. At stake is the majority in the Senate –now belonging to the Republicans.

If the Republicans win only one seat out of the two, they will retain their thin majority. On the other hand, if the Democrats pull some kind of a miracle and win both seats, the new majority in the Senate is a game changer for the markets, from a risk-on perspective.

What Is at Stake?

If the Democrats win even one single seat out of two, then it will be easier for the party to push legislation moving forward. A blue wave may come if the Democrats get both seats in Georgia – in this case, Democrats will be in control of both the House and the Senate.

The risk here is that the markets are not fully pricing the outcome. Trump is still far from recognizing his defeat, and Republicans hold on to the Senate majority. If they lose the Senate, the so-called all blue, democratic wave, has the power to create tensions in Washington and even see protests on the street.

From a financial perspective, any uprise leads to a higher U.S. dollar, the de-facto measure of risk. Let us not forget that January 20th is the inauguration day for the new president, and we are still far away from a smooth transition.

The stock market drifted higher yesterday until the cash opened, then moved lower to end the days into negative territory. It triggered a risk-off move, with the U.S. dollar gaining across the board – against the AUD, the GBP, the EUR, and so on. It just shows what is at stake in a risk-off move and why the battle for the Senate is important.

Also, let us not forget that this week is still thin from a liquidity point of view, as many investment houses run with limited personnel. If we add the fact that this is the NFP week, we have the potential to see aggressive market moves right at the start of the trading year.

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