Finance
Global markets are on alert for Biden’s departure as Trump’s trade moves increase
(Bloomberg) — The heated debate in Washington over whether President Joe Biden will drop his re-election bid is spilling over to Wall Street, where traders are shifting money into and out of the dollar, Treasuries and other assets that would be affected by the return of Donald Trump into office.
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The portfolio recalibration began late last week after Biden’s disastrous debate with Trump heightened concerns that the 81-year-old Democrat is too old to serve another term. The trading action afterward was most acute in the bond market, where 10-year Treasury yields rose as much as 20 basis points in subsequent days.
With speculation now rapidly mounting that Biden could drop out of the race — betting markets see less than a 50% chance of him remaining a candidate — investors are rushing to make contingency plans to respond to such an announcement over the Thursday, July 4, holiday and the following weekend . .
One fund manager, speaking on condition of anonymity given the sensitivity of the subject, said he was heading into a holiday season focused on the dollar and short-term debt as he believed a Biden withdrawal would lead to a hedge against the spike in the risk. Since Lyndon Johnson in 1968, no president has chosen to seek a second term and the election is just four months away.
“Markets have already been reassessing election odds since the debate, so the news over the past 24 hours has really only added fuel to the fire,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.
The consensus among traders and strategists is that a re-election of Trump, a 78-year-old Republican, would boost trade benefiting from an inflationary mix of looser fiscal policy and greater protectionism: a strong dollar, higher U.S. bond yields and gains in U.S. Treasury bonds . banking, healthcare and energy stocks.
Even some 16,000 kilometers away in Sydney, they are bracing themselves. Rodrigo Catril, a strategist at National Australia Bank, said “everyone” is preparing trade plans in case Biden ends his campaign.
“Either way, the market is betting that Trump will win the election,” Catril said. “It appears that Democrats face very difficult choices, none are easy, and none are likely to yield a better outcome.”
Here’s how the so-called Trump trade is playing out in the markets:
The dollar signal
The dollar gave one of the first signals about how markets would adjust to a potential Trump victory, gaining in the hours after last week’s debate. Although the dollar has been boosted this year by indications from the Federal Reserve that it plans to keep rates higher for longer, the currency saw a marked gain in real time as Trump dominated the showdown with Biden.
“A Trump victory raises the prospect of higher inflation and a stronger dollar, given his promise of more tariffs and a tougher stance on immigration,” JPMorgan Chase & Co. strategists said. led by Joyce Chang.
Potential losers in light of the rising dollar and Trump’s expected support for tariffs include the Mexican peso and the Chinese yuan.
Trade the yield curve
In the aftermath of the debate, money managers responded to the $27 trillion Treasury market by buying shorter-maturity notes and selling longer-maturity notes – a bet known as a steepening trade.
A slew of Wall Street strategists have touted the strategy, including Morgan Stanley and Barclays Plc, and urged clients to prepare for persistent inflation and higher long-term interest rates in a new Trump era.
In a two-day period starting late last week, the 10-year yield rose about 13 basis points versus the 2-year yield, the sharpest curve steepening since October.
Signs that traders are bracing for short-term volatility in the Treasury market emerged Wednesday from a buyer of a so-called choke structure, which profits from a move higher or lower in futures via strike prices. In addition to the potential risk over the holiday weekend surrounding Biden’s candidacy, the expiration also includes Friday’s U.S. jobs data and Fed Chairman Jerome Powell’s testimony next week.
Stock profits
The prospect of a Trump victory has supported numerous stocks that will benefit from his perceived positions on the regulatory environment, mergers and trade ties. The broader market has gained momentum in the wake of the debate.
The turn in the electoral tide since last week has “driven shares higher as Republicans are generally seen as more business-friendly,” said Tom Essaye, president and founder of Sevens Report.
Health insurers UnitedHealth Group Inc. and Humana Inc. and banks benefit from more flexible regulations. Discover Financial Services and Capital One Financial Corp. are among the credit card companies that have risen on their optimism about Trump, given that couple’s impending deal and speculation about possible changes to late fee rules.
Energy stocks such as Occidental Petroleum Corp. rose after the debate, as the former president is believed to have a pro-oil stance. Private prison stocks such as GEO Group Inc. have responded to his perceived hardline stances on immigration.
Financial ETFs
The exchange-traded fund market has shown one clear investment strategy lately: long banks on the bet that Trump will drive deregulation and a steeper Treasury curve thanks to his potentially inflationary agenda.
The Financial Select Sector SPDR Fund (ticker XLF), a $40 billion fund, saw its biggest inflows in more than two months last week, with investors adding about $540 million. So far this week, they’ve added $611 million amid the latest swings in the interest rate market.
Meanwhile, a thematic investment strategy designed to track Trump trading has struggled to gain traction. An ETF with the distinctive ticker MAGA and investing in Republican-friendly stocks has been slow to accumulate assets and has seen no material inflows this year, data compiled by Bloomberg show.
Asian impact
Asian markets are not immune to speculation either, as tensions between the US and China are simmering and tariffs are in play.
Trump has imposed 60% tariffs on imports from China and 10% tariffs on products from the rest of the world as he campaigns for a second term.
“Mr Trump’s re-election should be a negative factor for Chinese stocks as Mr Trump supports the idea of imposing substantially higher tariffs on US imports from China,” said Tomo Kinoshita, global market strategist at Invesco Asset Management Japan. “In that regard, Japanese stocks with high exposure to the Chinese market are likely to suffer if Mr. Trump wins.”
Crypto support
Trump has shown support for the crypto industry in recent weeks, meeting with industry executives and promising to ensure that all future Bitcoin mining takes place in the US.
That makes the Solana token — the fifth-largest cryptocurrency with a market cap of about $67 billion, according to CoinMarketCap — a potential beneficiary of a Trump return to the White House. Asset managers VanEck and 21Shares have applied for ETFs that would invest directly in the digital currency.
While many consider approval a long shot, some market participants believe a newly re-elected Trump would appoint a Securities and Exchange Commission chairman who is more crypto-friendly than Gary Gensler has been under Biden. That’s an outcome that would make a Solana ETF – and a corresponding rally in the token – more likely.
The prospect of a shakeup in the Democratic ticket is also likely to give Bitcoin a boost, according to Stephane Ouellette, CEO of FRNT Financial.
“The crazier the American political system looks, the better Bitcoin looks,” Ouellette said. “This is the kind of atmosphere Bitcoin would go for. The craziness in the American political system is a pro-Bitcoin factor.”
–With help 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.
(Adds a section on the Asian impact)
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