US equities rebounded on Tuesday following a sharp sell-off on the first trading day of the new year as investors eyed run-off Senate elections in Georgia that could determine the direction of the dollar, fiscal stimulus and US tax policy.

The benchmark S&P 500 closed 0.7 per cent higher while the tech-focused Nasdaq Composite index gained 1 per cent a day after Wall Street suffered its worst trading day since October.

The Cboe’s Vix index, which measures the expected volatility of the S&P 500 over the next 30 days, rose as high as 28.6 — above its long-run average of about 20 — as the number of Americans in hospital with coronavirus hit a new peak.

Keith Parker, head of US equity strategy at investment bank UBS, said stock markets would probably trade nervously until the Georgia result was called on Wednesday. “Equities hate uncertainty, which is why volatility spikes into these big risk events.”

If Democrats win both seats in the Georgia run-off, the party will take back the reins of the Senate, giving it control of both chambers of Congress as well as the White House.

Analysts at Goldman Sachs projected this so-called blue sweep would enable the Democrats to add $600bn of stimulus spending to the $900bn already agreed by lawmakers late last year. But some investors fear Democratic control of both houses could mean higher taxes and therefore lower earnings for US companies.

“If the Republicans keep the Senate, that’s a check on everything” Democrat president-elect Joe Biden campaigned for, said Randeep Somel, portfolio manager at M&G Investments. A Democrat sweep, he added, was likely to mean increases in corporate taxation “which when you are trying to get the economy into a period of recovery is not really ideal”.

The dollar, as measured against a basket of currencies, fell 0.4 per cent to stay around its lowest level since April 2018. Volatility on equity markets also burnished the appeal of US government debt. The yield on the 10-year Treasury bond, which moves inversely to its price, added 0.03 percentage points to 0.95 per cent.

In Europe, London’s FTSE 100 closed up 0.6 per cent but other major bourses in the region sank. The broader Stoxx Europe 600 index dipped 0.2 per cent while Germany’s Xetra Dax lost 0.6 per cent and the CAC in France fell 0.4 per cent.

The dips on the continent came after Boris Johnson, UK prime minister, ordered a third national lockdown for England on Monday, while Germany extended its lockdown by another three weeks.

Fund managers focused on Asia’s bright spots. China’s CSI 300, which tracks the largest shares on the Shanghai and Shenzhen stock exchanges, closed 1.9 per cent higher.

South Korea’s Kospi 200 closed 1.5 per cent higher, New Zealand’s NZX 50 ended the session up 2.1 per cent and the Hang Seng index in Hong Kong added 0.6 per cent.

China’s onshore-traded renminbi was 0.1 per cent stronger at Rmb6.4559 to the dollar a day after it crossed the 6.5 per greenback threshold for the first time in more than two years.

China’s currency is tightly controlled by the nation’s central bank. The People’s Bank of China’s decision to permit the renminbi to rise, said Savvas Savouri, chief economist at London-based hedge fund Toscafund, was “a signal that they don’t trust their traditional export markets in the west to stay healthy, so let’s focus on domestic consumption”.