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Democrat’s Alabama Senate win could be a ‘market moving implication,’ says strategist

  • Democrat Doug Jones clinched an unexpected victory in Alabama's Senate race, knocking the Republican majority down to 51-49
  • U.S. futures, Treasury yields and the dollar fell Wednesday morning on the election news
  • The Republican tax reform bill is in serious jeopardy if a vote takes place after Jones is seated
Alabama Democrat Doug Jones celebrates his victory over Judge Roy Moore at the Sheraton in Birmingham, Ala., on Tuesday, Dec. 12, 2017. Jones faced off against Judge Roy Moore in a special election for Jeff Sessions' seat in the U.S. Senate.
Bill Clark | CQ Roll Call
Alabama Democrat Doug Jones celebrates his victory over Judge Roy Moore at the Sheraton in Birmingham, Ala., on Tuesday, Dec. 12, 2017. Jones faced off against Judge Roy Moore in a special election for Jeff Sessions' seat in the U.S. Senate.

Democrat Doug Jones' stunning upset victory in Alabama's Senate race against Republican Roy Moore has knocked the GOP's Senate majority down to 51-49, a move that could potentially derail the party's pursuit of a landmark tax reform bill.

"If tax reform gets delayed, this will become a market-moving implication," Richard Kelly, head of global strategy at TD Securities, told CNBC on Wednesday. "Otherwise, especially for the next two days, I think everyone's looking at the Fed, ECB (European Central Bank)," he added, referencing upcoming central bank decisions on future interest rate rises.

U.S. stock futures, Treasury yields and the dollar fell Wednesday morning, indicating market doubts over whether legislators can indeed pass the bill.

The first Democrat to win a Senate seat in Alabama in 25 years, Jones was announced the winner of the deep-red state's legislative contest after a very tight race, edging over the embattled Moore by just over 1.5 percent late Tuesday night. This could throw the future of the Republican tax reform agenda into a precarious state as the GOP now holds a fragile 51-49 Senate majority.

Moore, meanwhile, has so far refused to concede, telling his supporters,"When the vote is this close... it's not over."

Market optimism for potential tax reform has manifested itself in soaring stocks — the S&P 500 and Dow Jones have all hit record highs in recent weeks. Retail shares have been performing especially well in anticipation of proposed corporate tax cuts.

Kelly noted, however, that as things currently stand, a vote on the tax bill is likely to happen before Jones is officially seated in Congress, and thus without his vote. "It doesn't actually look like they'll get the new senator seated somewhere in the latter part of two weeks out, which means that tax reform should be done."

The key determinant, Kelly said, was the timing of the vote itself. "The deadlines get more important. So, given what the Republicans are saying, which is that the conference committee will be done this week, (Donald) Trump will have it to sign next week, that means this election should not impact that," he said. "If that gets delayed, now this has significant implications."

The Republican conference committee is being held to reconcile differences between the U.S. Senate and House of Representatives' differing versions of the bill before it goes to President Trump's desk.

Tax reform has been a mainstay of Trump's agenda, and is considered his only realistic opportunity for legislative victory in 2017 after nearly a year of failed proposals, including healthcare.

The controversial Republican bill, which pledges to cut corporate taxes from the current 35 percent to a proposed 21 percent and cap the individual tax rate at 37 percent, was found by a Reuters poll to be opposed by nearly half of the American public.

The bill's supporters say it will boost economic growth and investment, while its detractors argue it will hurt middle-class families and the poor while exacerbating income inequality. The nonpartisan Congressional Budget Office calculated the Senate's version of the bill would add $1.4 trillion to the national deficit by 2027, but that projection excluded any amount that would be offset by potential economic growth created by tax cuts.