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Investors have strategically positioned themselves for Donald Trump’s potential White House return for weeks, showing a distinct trend of reducing long-term US bonds and snapping up Bitcoin, among other assets. However, with Joe Biden stepping out of the race, the calculus changes, potentially tilting the odds in favor of a Democratic victory, prompting traders to rethink their strategies.
Biden's withdrawal from the race and endorsement of Vice President Kamala Harris has injected a fresh wave of uncertainty into the markets. Gene Munster, co-founder and managing partner at Deepwater Asset Management, articulated the investor sentiment succinctly: "This brings more uncertainty. Confidence in a Trump victory was high, but now the markets must grapple with a new cycle of unknowns."
Biden’s recent announcement was yet another shock for the markets, following his unsteady debate performance and the attempted assassination on Trump, which paradoxically seemed to solidify some market belief in his eventual victory. With Biden out of the race, the so-called “Trump trade” — which has investors favoring sectors boosted by his policies on fiscal looseness, trade tariffs, and deregulation — now faces turbulence.
As the second-quarter earnings reports begin rolling in, investors are not just focused on political dynamics but also on when the Federal Reserve might pivot to cutting interest rates. This recalibration is evident in early Asian trading activities, where the market adopted a wait-and-see approach. The US dollar slightly declined against other major currencies, and Bitcoin hovered around $68,000. Meanwhile, futures for longer-maturity US bonds outperformed shorter-term counterparts, hinting at a mild reversal of the curve-steepened trade linked to a Trump victory.
Glen Capelo, Managing Director at Mischler Financial, notes, "The main focus in the bond market should be this new wave of uncertainty. Investors were getting very comfortable with the Trump trade narrative, which seems premature to unwind now."
Traders are eyeing Harris’s potential to clinch the Democratic nomination and whether she can effectively challenge Trump in the polls. PredictIt, a betting market, currently shows Harris as the Democratic favorite, with Trump still leading in the presidential race.
The basics of Trump's trade include rising US bond yields, gains in banking, healthcare, energy stocks, and Bitcoin, alongside a stronger dollar, despite Trump’s preference for a weaker US currency. However, this momentum began to wane last week as attention shifted to economic indicators and the Federal Reserve's future actions. Additionally, there has been a noticeable shift from Big Tech stocks to smaller companies in underperforming sectors.
Roundhill Financial CEO Dave Mazza advises investors to brace for volatility. "Should Vice President Harris mobilize quickly to challenge Trump significantly, expect volatility to linger. However, if Trump continues to gain poll momentum, the Trump trade could prevail, reducing volatility."
Market Live strategist Mark Cranfield suggests that traders may position for a weaker dollar without significant changes in Trump’s odds due to potential verbal attacks on foreign currencies. Meanwhile, Treasuries are expected to experience curve steepening concerns amid larger deficit expectations, even as yields fall with the Federal Reserve’s anticipated rate cuts.
Grace Fan, managing director of global policy research at GlobalData TS Lombard, indicates that a new Democratic ticket could wobble the Trump trade as markets reassess the odds. Nonetheless, these market moves may not shift drastically if Harris becomes the candidate.
Before Biden exited the race, some Asian investors anticipated his departure would bolster the Trump trade, affecting everything from broad China stock indices to Korean battery maker shares. Trump's critiques of weaker currencies like the yen and yuan could also limit pressure, even if a Trump victory would generally strengthen the dollar.
In the broader Asian market, Japanese and Indian equities seemed best positioned to benefit amid the shifting political landscape.
