(Bloomberg) -- Investors have been amassing wagers on Donald Trump’s return to the White House for weeks, trimming holdings of long-term U.S. bonds and buying Bitcoin, among other things. Now, they’re considering whether Joe Biden’s exit from the race boosts the odds of a Democrat victory — and how much they must recalibrate their bets.
One thing seems certain after the president dropped his reelection bid: Though the announcement was widely expected as the 81-year-old faced pressure from allies, it injects a wild card into the campaign that will likely translate into volatility for markets.
“This means more uncertainty,” said Gene Munster, co-founder and managing partner at Deepwater Asset Management. “There was a lot of confidence about Trump winning, and markets won’t like this new uncertainty, along with the news cycle about who is in, who is out, and all those unknowns.”
Those questions helped fuel a bid for the Swiss franc — a traditional haven asset — as trading began. U.S. Treasuries, the yen and gold, also common refuges from volatility, all saw modest demand. And Bitcoin edged up to its highest level in over a month.
Biden’s announcement Sunday that he was ending his effort to seek another term and endorsing Vice President Kamala Harris is the latest of several political shocks absorbed by markets in recent weeks.
As investors digest the latest news, the Trump trade — favoring sectors and strategies seen as benefiting from the Republican’s advocacy of looser fiscal policy, higher trade tariffs and weaker regulations — is being recalibrated.
This, while investors are also bracing for potential market convulsions from the wave of second-quarter earnings results that are just starting to come through, and as they continue to plot scenarios for when the U.S. Federal Reserve will begin cutting interest rates.
“The main thought process in the bond market should be what this new uncertainty brings. People had gotten to the point where they were piling into the Trump trade – with it beginning to become a real narrative. I had thought that was way too soon,” said Glen Capelo, managing director at Mischler Financial. “The curve steepening trade will probably have to unwind a little bit.”
Investors react
Many of the trades are predicated on the notion that a second Trump presidency would be fiscally expansionist, reigniting inflation.
That’s fueled appetite for the dollar in recent weeks — even as Trump himself has signaled he prefers the U.S. currency to weaken. In a recent interview with Bloomberg Businessweek, Trump criticized the depreciations in the yen and the yuan for their impact on American competitiveness.
The dollar edged lower on Monday, with a Bloomberg gauge of the currency falling 0.1 per cent. But that weakness didn’t translate to a significant boost for the Mexican peso, which fluctuated between gains and losses. Shorting the peso has been a favored expression of the Trump trade on the assumption that he would enact economic tariffs that would hurt U.S. trading partners, like Mexico.
Other popular ways to play a Trump win have included betting on rising U.S. bond yields, gains in bank, health and energy stocks, as well as Bitcoin.
Futures contracts on the S&P 500 Index rose in London trading. Private prison stocks GEO Group Inc. and CoreCivic Inc. will be in focus when US stock markets reopen, after recent gains on Trump’s tough immigration stance. Big banks will also be scrutinized as regulation-heavy sectors, such as financials, are seen doing better under Republicans.
“Biden’s unprecedented decision does introduce a wild card into the campaign, possibly leading to market volatility,” said Stefan Koopman, a senior macro strategist at Rabobank, adding that swings would pick up if Harris narrows the polling gap. “If Trump continues to lead in the polls and investors remain viewing his win as inevitable, the “Trump trade”, which implies deregulation, tax cuts, and increased fiscal spending, and should then lead to a steeper yield curve, a firmer USD and a boost for Bitcoin, will dominate.”
Still, some of the Trump trade in the bond market had already started to subside last week, as investors turned their attention back toward economic data and the Fed. Meanwhile, recent moves in stocks have been marked by a shift out of Big Tech shares and into smaller companies in sectors that had been laggards.
Markets are now debating what a so-called Harris Trade would look like, with Bloomberg Intelligence analysts writing that a win for her would likely mean “policy status quo” in many sectors. However, it could mean an increased focus on tax relief for lower-to-middle-income consumers and additional consumer-related regulatory actions, Nathan Dean and Andrew Silverman wrote in a note.
Betting market PredictIt has Harris as the favorite to become the Democratic nominee, but Trump still favored to win the presidency.
“It is too early to tell if the ‘Harris trade’ will cause a bounce back in U.S. equities after last week’s bruising declines,” said Kathleen Brooks, research director at XTB. “Harris was considered tough on oil and anti-shale and fracking. Thus, her surge in popularity in just 24 hours could impact the U.S. energy sector at the start of this week.”
Traders are likely to remain jumpy as traders wait to see if Harris secures her party’s nomination and gathers enough momentum to challenge Trump’s lead in the polls.
What Bloomberg’s strategists say...
“A relatively muted market reaction looks warranted. Trump was likely to win yesterday, and Trump is likely to win today. It’s hard to see why traders would massively reposition portfolios unless polls start showing a likely Harris victory, or at least a close race.”
— Eddie van der Walt, Markets Live strategist. See more on MLIV.
There is little historical data to use for a read on how markets will process this development in coming days and weeks. The most recent example of a sitting president not seeking a second term was Lyndon Johnson in 1968.
“We just don’t have a lot of precedent for a situation with a candidate who did not go through the normal primary process,” said Julie Biel, portfolio manager and chief market strategist at Kayne Anderson Rudnick. “So we are once again continuing our very long-term love affair with unprecedented times.”
With assistance from George Lei, Isabelle Lee, Elena Popina, Michael Mackenzie, Ryan Vlastelica, Matthew Burgess, Carter Johnson, Anya Andrianova, Bre Bradham, Tasos Vossos, Elizabeth Stanton, Ruth Carson, Nazmul Ahasan, Alice Gledhill and Naomi Tajitsu
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