Stocks Climb as Treasuries Drop Amid Georgia Race

 Stocks rose and bonds dropped amid key elections in Georgia that will decide which party controls the U.S. Senate for the next two years, setting the scope of President-elect Joe Biden’s agenda.

In a session marked by thin trading volume, the S&P 500 rebounded after suffering its worst start to a year since 2016. Energy shares surged as oil traded near $50 a barrel, while the Russell 2000 Index of smaller companies jumped 1.7%. With markets factoring in a greater chance of a Democratic sweep in Congress, some analysts see the potential for volatility. In anticipation to the outcome of the vote, which will likely be known on Wednesday, Treasury yields climbed -- with a key curve measure reaching its steepest level in four years. The dollar slid to the lowest since February 2018.

Whether or not Wall Street is getting more comfortable with the idea of Democrats taking control of both chambers of Congress, the scenario implies the possibility of a more generous stimulus package. That could potentially lead to upward pressure on inflation and interest rates as well as higher taxes to pay for fiscal aid. Conversely, should either Republican incumbent win re-election, the party would have enough votes to block any Biden initiative.

“We don’t view a Democrat Senate as a bearish game changer in the short term because there would still be a lot of positives in this market,” Tom Essaye, a former Merrill Lynch trader who founded “The Sevens Report” newsletter, wrote in a note to clients. “We’d look to buy on any material dip, but we should brace for more volatility going forward if that’s the outcome from today’s election.”

Meanwhile, President Donald Trump failed again to invalidate his election loss in Georgia and allow the state’s Republican-led legislature to declare him the winner -- his latest courtroom defeat in a quixotic effort to remain in office despite losing the Nov. 3 vote.

Another news development that caught investors attention on Tuesday was the New York Stock Exchange’s surprise decision to spare three major Chinese telecommunications companies from being delisted. Treasury Secretary Steven Mnuchin called NYSE Group Inc. President Stacey Cunningham to express his disapproval, according to two people familiar with the matter. Several U.S. officials said the move marks a temporary reprieve, not a sign that tensions between Washington and Beijing are easing.

Elsewhere, Saudi Arabia surprised the oil market with a large reduction in its output for February and March, carrying a greater burden of OPEC+ cuts while other producers hold steady or make small increases.