Why is Georgia making Dalal Street nervous

Why is Georgia making Dalal Street nervous

Global equity markets are nervous. Crucial elections in America that will decide control of the US Senate; an American president who refuses to resign or concede; nervous fixed income investors wondering if inflation is set to make a comeback. Financial markets couldn’t have asked for a stormier start to 2021. Chances are that financial markets would either be heaving a sigh of relief or be slip sliding away down by the time you end the day today. And the reason for that lies in elections in the US state of Georgia. Control of the US senate lies in the hands of the party that wins both the elections on January 5. Investors believe that a Democrat victory would unleash a wave of spending that could lift the economy and the dollar, but also unshackle slumbering inflation. The ‘Reflation Trade’ is a way to play this trend and it has been underway for some time since Joe Biden’s victory on November 3. How this trade unfolds will be keenly watched and it could have some shock for Indian markets if inflation and spending increase appreciably. ET tells you what to expect.

What is Georgia and Why Should I Care?

Control of the US Senate is dependent on two Senate elections on January 5 in Georgia. The Republicans now have a 52-48 majority and a loss in both seats will hand control over to Democrats as vice-president Kamala Harris as the Senate’s presiding officer will have the casting vote in case of a tie. Investors expect massive spending with the Senate in Democrat hands with interest rates and inflation expected to rise.

Inflation yes, but what on Earth is reflation?
A reflation trade includes purchase of growth stocks, industrial commodities gold and other assets also as a hedge against inflation. Investors dump existing bonds to buy new ones at higher rates causing a bond market sell-off

Ok, Why Will It Affect India?

Indian markets are hugely dependent on foreign flows. A rising dollar or higher rates in the US will suck out some of the flows.

Didn’t the Fed say it will not hike rates…

Yes, the Fed will keep rates low and even allow inflation to overshoot till the economy and the job markets recover

So, Net-Net, What’s the Deal for Indian Markets?

FPIs will keep buying, because the India story is getting some mojo back. If Republicans win even one seat, they will keep the Senate, and markets will not be too worried. Even if Democrats win, this will take some time to play out.

Are there other factors that will affect Indian markets in 2021?
Of course. Indian economy’s performance, earnings growth will matter. The budget on February 1 will set the tone for much of the first half

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