Treasuries take hit as US election risks come into focus: Markets Wrap

(Bloomberg) — The world’s largest bond market took a hit as investors weighed the potential economic implications of the November U.S. election, following last week’s presidential debate between Joe Biden and Donald Trump.

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While many traders say it’s probably too early to start taking positions or reading too much into election headlines, Wall Street kept a close eye on news surrounding the presidential race. As it did on Friday, Treasuries fell, with longer-term maturities largely underperforming shorter-term ones. Stocks rose slightly amid a rally in tech megacaps. The dollar rose.

Bloomberg News reported that the Democratic National Committee is considering formally nominating Biden as early as mid-July to ensure he is on the November ballot. And a divided Supreme Court ruled that Trump has some immunity from criminal charges for trying to overturn the 2020 election results, all but ensuring that a trial will not happen before the November election.

Investors are now looking to the US election as an even bigger potential market event, as it currently appears that Trump’s chances of retaking the White House have improved significantly, according to Ian Lyngen and Vail Hartman of BMO Capital Markets.

“During last week’s presidential debate, neither candidate proposed policies that would reduce the country’s fiscal deficit, which is growing unsustainably,” said Jose Torres at Interactive Brokers. “Meanwhile, the political landscape in the U.S. is highly uncertain as members of the media and several Democrats call for Biden to drop out of the race for the White House following his poor debate performance.”

Yields on the 10-year Treasury approached 4.5%. The S&P 500 rose to about 5,475. Tesla Inc. jumped about 6%. Chewy Inc. suffered a whipsaw when Keith Gill — known as “Roaring Kitty” — disclosed a passive stake in the online pet-products retailer. Gill was sued for allegedly orchestrating a “pump and dump” scheme involving shares of GameStop Corp.

The euro rose as French election results suggested there was a reduced likelihood of extreme policies coming from the far right.

After last week’s presidential debate changed the odds of Trump winning over Biden, Morgan Stanley strategists Matthew Hornbach and Guneet Dhingra are reassessing their election assumptions.

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“The key issue is that the market now has to deal with the rising probabilities of changes in immigration and tariff policies in an economy where growth is already cooling, making the market more likely to price in more rate cuts,” they wrote. “On the other hand, increased prospects of a Republican victory, amid the growing focus on deficits, could put upward pressure on long-term premiums.”

Treasury reinforcements gain preference in mid-year: research summary

“While the rates market may still trade heightened risks of a Republican victory with an increasingly steep bias for now, we see room for the focus to shift to risks stemming from trade policy (where the differentiation between outcomes is likely to be greater) as the election approaches,” said George Cole of Goldman Sachs Group Inc.

While there is a common debate about whether election timing affects the Federal Reserve’s policy choices, history shows that the U.S. central bank has not shied away from taking action during these years, according to Komson Silapachai of Sage Advisory.

Since the 1950s, the Fed has changed its policy rate in every presidential election year, with the exception of 2012, when interest rates were already at zero, Silapachai noted. Even during the second half of presidential election years, at the height of the campaign season, the Fed has not shied away from changing policy as economic and financial conditions warrant.

“The Fed will be guided by economic data, not political pressure, while remaining true to its core objectives of managing inflation and unemployment,” Silapachai added.

The dollar is likely to remain elevated in the second half of the year as the Treasury yield advantage improves, decent U.S. growth momentum and November election risks ease, JPMorgan Chase & Co. strategists led by Meera Chandan wrote.

They noted that growth-supportive fiscal policies should also be positive in dollar terms in the near term, despite the medium-term deficit implications.

Meanwhile, Morgan Stanley equity strategists led by Michael Wilson say investors “should remain selective” and maintain a bias toward quality U.S. stocks heading into election season. Such companies have more stable earnings, stronger balance sheets and higher margins.

“Risks are skewed to the downside for growth under Republican victory scenarios due in part to immigration reform and tariffs,” they wrote. With inflation and fiscal sustainability also in focus, such dynamics “are likely headwinds for lower-quality cyclical and small-cap markets in this scenario.”

U.S. companies face their highest level of profits in nearly three years as they prepare to report second-quarter results, according to Goldman Sachs Group Inc. strategists led by David Kostin.

“The magnitude of earnings per share will likely decline as consensus forecasts set a higher bar than in prior quarters,” Kostin said. “We expect the outperformance ‘reward’ for stocks that beat estimates to be lower than average again this quarter.”

Corporate Highlights:

• Teva Pharmaceutical Industries Ltd. is being investigated by the U.S. Federal Trade Commission over patents on certain drugs, including asthma inhalers, according to a person familiar with the matter.

• Boeing Co. agreed to buy back Spirit AeroSystems Holdings Inc. for $37.25 a share in an all-stock deal that values ​​the supplier at $4.7 billion, undoing a two-decade separation as the U.S. planemaker tries to fix its manufacturing flaws.

• French antitrust authorities are preparing to charge Nvidia Corp. with alleged anticompetitive practices, Reuters reported, as the world’s most valuable chipmaker faces increasing regulatory scrutiny.

• Meta Platforms Inc. has been given a warning over its subscription model for ad-free services on Instagram and Facebook, risking potentially hefty fines in the European Union’s latest crackdown on Big Tech under tough new rules.

• SVB Financial Group secured a more than $600 million cut in its potential tax bill, increasing some bonds tied to the bankrupt former parent of Silicon Valley Bank and removing a hurdle on its path to paying creditors in Chapter 11.

Main events of this week:

• Eurozone CPI, unemployment, Tuesday

• US Job Openings Tuesday

• Jerome Powell and Christine Lagarde to speak at ECB forum in Portugal on Tuesday

• China Caixin services PMI, Wednesday

• Eurozone S&P Global Eurozone Services PMI, PPI, Wednesday

• US Fed Minutes, ADP Employment, ISM Services, Factory Orders, Initial Jobless Claims, Durable Goods, Wednesday

• Fed’s John Williams speaks Wednesday

• UK General Election, Thursday

• US Independence Day Holiday, Thursday

• Eurozone retail sales, Friday

• US jobs report, Friday

• Fed’s John Williams speaks Friday

Some of the main movements in the markets:

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• The S&P 500 was up 0.3% as of 4 p.m. ET.

• The Nasdaq 100 rose 0.7%

• The Dow Jones Industrial Average rose 0.1%

• MSCI World Index rose 0.3%

Coins

• The Bloomberg Dollar Spot Index rose 0.1%

• The euro rose 0.2% to $1.0739

• The British pound remained virtually unchanged at $1.2643

• The Japanese yen fell 0.4% to 161.46 per dollar

Cryptocurrencies

• Bitcoin up 2% to $63,114

• Ether rose 1.5% to $3,467.71

Titles

• The yield on 10-year Treasury notes rose eight basis points to 4.48%

• Germany’s 10-year yield rose 11 basis points to 2.61%

• The yield on 10-year British bonds rose 11 basis points to 4.28%

Commodities

• West Texas Intermediate crude rose 2.4% to $83.48 a barrel

• Spot gold rose 0.2% to $2,331.72 an ounce

This story was produced with assistance from Bloomberg Automation.

–With assistance from Vildana Hajric, Sagarika Jaisinghani, Masaki Kondo, Felice Maranz, Lynn Thomasson, Julien Ponthus, John Viljoen, Catherine Bosley and Matthew Burgess.

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