Trade with Trump set to gain momentum as markets eye Republican victory

As global financial markets began to reopen following the attempted assassination of Donald Trump, one thing seemed likely: the Trump trade was about to get even bigger.

The series of bets, based on the expectation that the Republican’s return to the White House would bring tax cuts, higher tariffs and looser regulations, had already been put in place. gain territory since President Joe Biden’s poor performance in last month’s debate in danger his re-election campaign.

But the exchanges were expected to escalate, with Trump galvanizing supporters and attracting sympathy by displaying defiant resilience after being shot in the ear on stage at a rally in Pennsylvania.

The dollar, which could gain value if easy fiscal policy keeps bond yields elevated, started to climb against most of its peers in early Asian trading, with the Mexican peso leading the decline, weakening 0.3%. Bitcoin rose above $60,000, potentially reflecting Trump’s favorable stance on cryptocurrencies, while S&P 500 futures for September were up 0.1% as of 6:05 p.m. in New York.

“For us, the news reinforces the fact that Trump is the frontrunner,” Mark said. McCormickGlobal Head of Foreign Exchange and Emerging Markets Strategy at Toronto Dominion Bank“We remain optimistic about the US dollar for the second half and early 2025.”

The only caveat to all this is that the emergence of political violence could heighten concerns about instability in the United States and push investors into safe-haven assets, potentially eclipsing some of the market positioning that has already taken place in the run-up to the election.

While 10-year Treasury futures for September were down in early Asian trading, U.S. government bonds tend to rally as investors seek temporary safety, potentially distorting Trump’s trading in the Treasury market, which is based on a bet that the yield curve will steepen as long-term bonds underperform on expectations that Trump’s fiscal and trade policies will stoke inflationary pressures.

Additionally, some investors may want to book early gains or be wary of committing deeper into an already crowded position.

“Political risk is binary and difficult to hedge, and uncertainty was high given the tight nature of the race,” said Priya Misra, portfolio manager at JPMorgan Investment Management.

“It adds to the volatility. I think it further increases the odds of a Republican victory,” she said, adding that it “could put more pressure on the curve.”

Traders don’t expect the Trump assassination attempt to derail the stock market’s long-term trajectory, but a resumption of short-term price action is likely. The market has already had to contend with speculation that valuations have become too high, given the rise of artificial intelligence stocks and the risks posed by high interest rates and political uncertainty.

But investors also expect banking, health care and oil industry stocks to benefit from a Trump victory.

“The attack will increase volatility,” said David Mazza, CEO of Roundhill Investments, predicting that investors may seek temporary safety in defensive stocks such as mega-caps. He added that it “also provides support for stocks that are doing well in a steepening yield curve, particularly financials.”

The first reactions echo what was seen after the first presidential debate in late June, when Biden’s weak performance was seen as a factor boosting Trump’s chances of election.

The dollar advance During this event, investors quickly began to adopt a gamble of buying shorter-dated bonds and selling longer-dated bonds, known as steepener tradeThe trade paid off, with yields on 30-year Treasury notes jumping nearly 5 basis points below the 2-year yield, down from about 37 basis points below before the debate.

“If the market believes Trump’s chances of winning are higher than they were on Friday, then we expect the bond market to sell off in the manner we saw immediately 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, a major increase in Trump’s election chances could push the Federal Reserve to stay on hold longer, Purves said.

“Trump’s stated policies are (at least now) more inflationary than Biden’s,” he wrote, “and we think the Fed will want to accumulate as much dry energy as possible.”

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