When global financial markets reopened after the assassination of Donald Trump, one thing seemed likely: the Trump trade would gain even more momentum.
That series of bets – based on expectations that the Republican’s return to the White House would bring tax cuts, higher tariffs and looser regulations – had already gained ground since President Joe Biden’s poor performance at the debate last month put his campaign in jeopardy.
However, it was expected that these agreements would become even more solid after Trump’s defiant resilience, following a shot in the ear on stage at a rally in Pennsylvania, mobilized his supporters and won sympathy.
The U.S. dollar – which would gain if loose fiscal policy kept bond yields high – began to rise against most currencies early in Asian trading. The Mexican peso was the biggest loser, down 0.3 percent. Bitcoin rose above $60,000, possibly reflecting Trump’s crypto-friendly stance, while S&P 500 index futures for September rose 0.1 percent overnight in New York.
“For us, the news confirms that Trump is the frontrunner,” said Mark McCormick, global head of foreign exchange and emerging markets strategy at Toronto Dominion Bank. “We remain dollar bulls for the second half of the year and early 2025.”
With all this said, it is important to note that the rise in political violence could heighten concerns about instability in the US and push investors into safe havens, potentially overshadowing some of the market positioning that has already been put in place ahead of the election.
While September 10-year U.S. Treasury futures declined in early Asian trade, U.S. Treasuries tend to rise when investors seek temporary safety. This could distort trading in Trump Treasuries in the Treasury market, which relies on bets on a steeper yield curve as long-term bonds underperform on expectations that Trump’s fiscal and trade policies could stoke inflationary pressures.
In addition, some investors may want to book profits early or be reluctant to go deeper into an already crowded position.
“Political risk is binary and difficult to hedge, and uncertainty was high due to the close race,” said Priya Misra, portfolio manager at JPMorgan Investment Management.
“That increases volatility. I think it increases the chance of a Republican victory even further,” she said, adding that “the pressure on the curve could become steeper.”
Stock investors are preparing for at least a short-term increase in volatility when trading in S&P 500 futures begins at 6 p.m. in New York (6 a.m. AWST).
While traders generally do not expect Trump’s assassination attempt to derail stock market performance in the long term, short-term price fluctuations are likely. The market is already grappling with speculation that valuations have become too high given the boom in artificial intelligence stocks and the risks posed by higher interest rates and political uncertainty.
However, investors had also expected that shares of banks, healthcare providers and the oil industry would benefit from a Trump victory.
“The attack will increase volatility,” said David Mazza, CEO of Roundhill Investments, predicting that investors may temporarily seek safety in defensive stocks such as mega-cap companies. He said it “also provides support for stocks that do well on a steeper yield curve, particularly financials.”
The initial reactions are similar to those after the first presidential debate in late June, when Biden’s weak performance was seen as an improvement in Trump’s election chances.
The dollar rose during the event, and investors soon began making a bet to buy shorter maturities and sell longer ones – a so-called steepener trade. This trade has paid off, with 30-year Treasury yields rising from around 37 basis points before the debate to nearly 5 basis points below 2-year Treasury yields.
“If the market feels that Trump’s chances of winning are higher than they were on Friday, then we would expect to see a sell-off at the back end of the bond market like we saw immediately after the debate,” said Michael Purves, CEO and founder of Tallbacken Capital Advisors.
Although bond traders are already expecting at least two interest rate cuts in 2024, Purves believes a significant improvement in Trump’s election chances could prompt the US Federal Reserve to keep its interest rates unchanged for even longer.
“Trump’s stated policies are (at least now) more inflationary than Biden’s,” he wrote, “and we believe the Fed wants to accumulate as much dry power as possible.”
Bloomberg