(Bloomberg) — Washington’s heated debate over whether President Joe Biden will rule out re-election on Wall Street, where traders move money to and from the dollar, Treasuries and other assets that will be affected. Donald Trump is back in office.
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The recalibration of his portfolio began late last week after Biden’s ugly debate with Trump heightened concerns the 81-year-old Democrat is too old to serve another term. The next trading action was most acute in the bond market, where the yield on the benchmark 10-year Treasuries jumped as much as 20 basis points in the following days.
With speculation now rising rapidly that Biden could drop out of the race – betting markets see less than a 50% chance of him remaining the candidate – investors are rushing to make contingency plans in response to the announcement during the Fourth of July holiday and the following weekend . .
One fund manager, speaking on condition of anonymity because of the sensitivity of the topic, said he will enter the holiday biased toward the dollar and short-term debt as he hedges against a surge in risk that he thinks will be triggered by Biden’s resignation. No president has voted against seeking a second term since Lyndon Johnson in 1968 and the election is just four months away.
“The market has been repricing the election odds since the debate, so the news over the past 24 hours really just adds fuel to the fire,” said Gennadiy Goldberg, head of US rate strategy at TD Securities in New York.
The consensus among traders and strategists is that the re-election of Trump, a 78-year-old Republican, will push trade to benefit from an inflationary mix of looser fiscal policy and greater protectionism: A stronger dollar, higher US bond yields and gains in banks, healthcare and energy stocks.
Even some 10,000 miles away, in Sydney, he was preparing. Rodrigo Catril, a strategist at National Australia Bank, said “everyone” is preparing to trade plans if Biden ends his campaign.
“Anyway, the market is betting on Trump winning the election,” Catril said. “It seems that Democrats are stuck with very difficult choices, none of which are easy, and none of which can produce better results.”
Here’s how Trump’s so-called trade is shaping up in the market:
Dollar Signal
The dollar gave one of the earliest signals of how markets will adjust to a potential Trump victory, gaining hours after last week’s debate. While the greenback has gotten a boost this year from indications the Federal Reserve intends to keep interest rates on hold for longer, the currency took a clear bump in real time as Trump dominated the faceoff with Biden.
“A Trump victory raises the prospect of higher inflation and a stronger dollar, given the promise of more tariffs, and a tough stance on immigration,” said JPMorgan Chase & Co. strategists led by Joyce Chang.
Potential losers in the face of a rising dollar and Trump’s support for tariffs include the Mexican peso and the Chinese yuan.
Trading the Yield Curve
After the debate, money managers in the $27 trillion Treasury market responded by buying shorter-maturity notes and selling longer ones — bets known as steeper trades.
Several Wall Street strategists have cited the strategy, including Morgan Stanley and Barclays Plc, urging clients to prepare for sticky inflation and longer maturities in another Trump term.
In the span of two days since the end of last week, the 10-year yield rose by about 13 basis points relative to the 2-year rate, in the sharpest curve curve since October.
Signs of traders bracing for near-term volatility in the Financial market appeared Wednesday, through the buyer of the so-called strangle structure, which benefits from a higher or lower move in futures through attack prices. Along with the potential risks of the holiday weekend surrounding Biden’s candidacy, the expiration also included Friday’s US jobs data and next week’s testimony from Fed Chairman Jerome Powell.
Stock Gain
The prospect of Trump’s victory has supported many stocks that have benefited from his perceived stance on the regulatory environment, mergers and trade relations. The broad market has been higher because of the debate.
The turn of the election tide since last week has “meaning stocks are higher because Republicans are generally viewed as more business-friendly,” said Tom Essaye, president and founder of the Sevens Report.
Health insurance UnitedHealth Group Inc. and Humana Inc. and banks benefit from looser regulations. Find Financial Services and Capital One Financial Corp are among the credit card companies optimistic about Trump, given the pending deal and speculation about possible changes to the final fee rules.
Energy stocks like Occidental Petroleum Corp. rose after the debate, given that the former president is seen as having a pro-oil stance. Private prison stocks like GEO Group Inc. has responded to views on immigration that he considers difficult.
Financial ETFs
The exchange-traded fund market has shown its last clear investment strategy: Banks are long on the bet that Trump will push for deregulation and a steeper Treasury curve because of his potentially inflationary agenda.
The Financial Select Sector SPDR fund (ticker XLF), a $40 billion fund, last week saw its biggest inflows in more than two months, with investors adding about $540 million. So far this week, they have added $611 million amid the latest gyrations in the interest rate market.
Meanwhile, thematic investment strategies designed to ride the Trump trade have struggled to gain traction. ETFs that sport the eye-catching MAGA ticker and invest in Republican-friendly stocks have been slow to gather assets and have not seen any material inflows this year, data compiled by Bloomberg show.
Asian impact
Asian markets are also not immune to the speculation, with US-China tensions simmering and rates spinning.
Trump has floated 60% tariffs on imports from China and 10% duties on those from other countries while campaigning for a second term.
“Mr Trump’s re-election should be a negative factor for Chinese equities as Mr Trump supports the idea of ​​imposing higher tariffs on US imports from China,” said Tomo Kinoshita, global market strategist at Invesco Asset Management Japan. “In this regard, Japanese stocks with high exposure to the Chinese market will be hurt if Mr. Trump wins.”
Crypto support
Trump has shown his support for the crypto industry in recent weeks by meeting with industry executives and promising to ensure all future Bitcoin mining is done in the US.
The creator of the Solana token – the fifth largest cryptocurrency with a market capitalization of around $67 billion, according to CoinMarketCap – is one potential beneficiary of Trump’s return to the White House. Asset managers VanEck and 21Shares have filed an ETF that will invest directly in digital currencies.
While many see the agreement as a long shot, the thinking among some market participants is that the newly re-elected Trump will choose a more crypto-friendly chairman of the Securities and Exchange Commission than Gary Gensler who is under Biden. It’s an outcome that will make the Solana ETF — and the corresponding rally in the token — more likely.
The prospect of a shakeup for the Democratic ticket is also likely to boost Bitcoin, according to Stephane Ouellette, chief executive of FRNT Financial.
“The crazier that the US political system looks, the better that Bitcoin looks,” Ouellette said “This is the kind of vibe that Bitcoin will go for. The madness in the US political system is a pro-Bitcoin factor.
–With assistance from Jan-Patrick Barnert, Natalia Kniazhevich, Ruth Carson, Bre Bradham, Nazmul Ahasan, Winnie Hsu, Carter Johnson, Vildana Hajric, Liz Capo McCormick, Ye Xie, Emily Nicolle, Katie Greifeld, Edward Bolingbroke and Anya Andrianova.
(Added section on Asian influence)
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