(Bloomberg) — As the world’s financial markets begin to reopen after Donald Trump’s assassination attempt, there’s a chance: Trump’s trade will gain more momentum.
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The series of bets – based on anticipation that a Republican return to the White House will lead to tax cuts, higher tariffs and looser regulations – has been on the rise since President Joe Biden’s poor performance in last month’s debates led to his re-election campaign.
But the trade is expected to run deeper, with Trump galvanizing supporters and drawing sympathy by showing unabashed resilience after being shot in the ear on stage at a Pennsylvania rally.
The dollar – which will gain if loose fiscal policy keeps bond yields up – started to move higher against at least one of its peers in early Asian trade. Bitcoin rose above $60,000, possibly reflecting Trump’s crypto-friendly stance.
“For us, the news reinforces that Trump is in charge,” said Mark McCormick, head of foreign exchange and emerging markets strategy at Toronto Dominion Bank. “We remain bullish on the US dollar for the second half and early 2025.”
Political violence in the U.S. could cause investors to push for haven assets, potentially outpacing some of the positions already held in the presidential campaign.
Treasuries tend to rally when investors seek temporary safety, in order to undermine Trump’s trade in the bond market, which relies on wagering that the yield curve will steepen because long-term bonds underperform in anticipation that Trump’s fiscal and trade policies will fan inflationary pressure. . Additionally, some investors may want to deal early or be wary of going deeper into already crowded positions.
“Political risk is binary and difficult to hedge, and uncertainty is high as with the close nature of the race,” said Priya Misra, portfolio manager at JPMorgan Investment Management.
“It increases volatility. I think it further increases the likelihood of a Republican sweep,” he said, adding that “it could add pressure on the curve.”
Equity investors are bracing for at least a jump in volatility when S&P 500 futures begin trading at 6 p.m. in New York.
While traders generally don’t expect Trump’s assassination attempt to disrupt the stock market’s long-term trajectory, a price reversal is likely imminent. Markets have grappled with speculation that valuations have weakened over time, due to artificial intelligence stocks and the risks posed by interest rates and political uncertainty.
But investors have also been hoping that bank stocks, health care and the oil industry will benefit from Trump’s victory.
“The unprecedented nature of the attack will increase volatility,” said David Mazza, CEO at Roundhill Investments, predicting investors may seek temporary safety in defensive stocks like mega-cap companies. He said it “also adds support to stocks that are well along the yield curve, especially financials.”
The initial reaction echoed what was seen after the first presidential debate in late June, when Biden’s weak performance appeared to fuel Trump’s potential election.
The dollar advanced during the event, and investors immediately placed bets that included buying shorter-maturity notes and selling longer-dated notes — known as steeper trades. The trade has paid off, with the 30-year Treasury yield rising to nearly 5 basis points below the 2-year low from around 37 basis points below before the debate.
“If the market perception that Trump’s chances of winning are higher than they were on Friday – then we expect the end of the bond market to sell off in the way we saw after the debate,” Michael Purves, CEO and founder of Tallbacken Capital Advisors, wrote in an email.
While bond traders have priced in at least two interest rate cuts in 2024, the main boost in the likelihood of Trump’s election could push the Federal Reserve to stay on hold for longer, according to Purves.
“Trump’s policy is (at least for now) more inflationary than Biden’s,” he wrote, “and we think the Fed will want to accumulate as much dry power as possible.”
–With assistance from Liz Capo McCormick, Isabelle Lee, Sid Verma, Edward Dufner, Esha Dey and Michael G. Wilson.
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