(Bloomberg) — The heated debate in Washington over whether President Joe Biden will call off his re-election bid is moving to Wall Street, where traders are shifting money in and out of the dollar, Treasuries and other assets that could be affected by Donald Trump’s return to office.
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The recalibration of the portfolios began late last week after a disastrous debate between Biden and Trump exacerbated concerns that the 81-year-old Democrat was too old to serve another term. The trading action was then sharper in the bond market, with yields on the benchmark 10-year Treasury note jumping as much as 20 basis points in the days that followed.
With speculation rapidly mounting that Biden could drop out of the race — with betting markets seeing a less than 50% chance of him remaining the nominee — investors are hastily preparing contingency plans to respond to such an announcement over the Fourth of July holiday on Thursday and the following weekend.
One fund manager, speaking on condition of anonymity because of the sensitivity of the issue, said he was heading into the holiday period with a bias toward the dollar and short-term debt as a hedge against the risk premium he believes would arise from Biden’s withdrawal. No president has chosen not to seek a second term since Lyndon Johnson in 1968 and the election is just four months away.
“Markets have already been re-pricing the election odds since the debate, so the news over the past 24 hours has only added fuel to the fire,” said Gennady Goldberg, head of U.S. rates strategy at TD Securities in New York.
The consensus among traders and strategists is that the re-election of Trump, a 78-year-old Republican, would spur trades that benefit from an inflationary mix of looser fiscal policy and greater protectionism: a stronger dollar, higher U.S. bond yields, and gains in banking, health and energy stocks.
Even about 10,000 miles away, in Sydney, investors are bracing themselves. “Everyone” is preparing trading plans in case Biden ends his campaign, said Rodrigo Catril, a strategist at National Australia Bank.
“In any case, the market is betting on a Trump win,” Cattrell said. “Democrats seem stuck in a very difficult mix of choices, none of which are easy, and none of which are likely to produce a better outcome.”
Here’s how the so-called Trump trade plays out in the markets:
dollar sign
The dollar gave one of the earliest signals about how markets are adjusting to a potential Trump win, rallying in the hours after last week’s debate. While the dollar has gotten a boost this year from the Federal Reserve’s signals that it intends to keep interest rates higher for longer, the currency got a clear boost in real time as Trump dominated the showdown with Biden.
“A Trump win raises the prospect of higher inflation and a stronger dollar, given his promise of more tariffs and a tougher stance on immigration,” said JPMorgan Chase & Co. strategists led by Joyce Chang.
Potential losers in the face of a stronger dollar and Trump’s expected support for tariffs include the Mexican peso and the Chinese yuan.
yield curve trading
Following the debate, money managers in the $27 trillion U.S. Treasury market responded by buying shorter-dated bonds and selling longer-dated ones — a bet known as the “decline trade.”
The strategy has been hailed by a number of Wall Street strategists, including Morgan Stanley and Barclays, who have urged clients to prepare for steady inflation and higher yields on long-term bonds in another Trump term.
In two days starting late last week, 10-year yields rose by about 13 basis points compared to 2-year bond prices, the steepest downward slope since October.
Signs emerged Wednesday that traders are bracing for near-term volatility in the Treasury market, with buyers of so-called strangle structures, which profit from moves up or down in futures contracts through strike prices. In addition to potential weekend risks around Biden’s nomination, the expiration also includes U.S. jobs data on Friday and testimony from Federal Reserve Chairman Jerome Powell next week.
Stock gains
Trump’s chances of winning have supported a slew of stocks that stand to gain from his perceived positions on the regulatory environment, mergers and trade relations. The market as a whole has risen in the wake of the debate.
The shift in the electoral tide since last week “means stocks are higher as Republicans are generally seen as more business-friendly,” said Tom Isay, president and founder of Sevens Report.
Health insurers UnitedHealth Group Inc. and Humana Inc. and banks are expected to benefit from the regulatory easing. Discover Financial Services and Capital One Financial Corp. are among the credit card companies whose shares have risen on Trump optimism, given the pending deal between the companies and speculation about possible changes to late-fee rules.
Energy stocks like Occidental Petroleum Corp. rose after the debate, as the former president is seen as taking a pro-oil stance. Private prison stocks like GEO Group Inc. also reacted to his hardline views on immigration.
Financial Exchange Traded Funds
The ETF market has demonstrated a clear investment strategy of late: betting that Trump will spur deregulation and a steeper Treasury curve thanks to his potentially inflationary agenda.
The $40 billion SPDR Financial Sector Select Fund (ticker XLF) saw its biggest inflow 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 volatility in the interest rate market.
Meanwhile, a thematic investment strategy designed to profit from Trump’s trading has struggled to gain traction. An exchange-traded fund with the catchy ticker MAGA that invests in Republican-friendly stocks has been slow to build assets and has seen no material inflows this year, according to data compiled by Bloomberg.
Asian influence
But Asian markets are not immune to speculation either, with tensions between the US and China escalating and tariffs being imposed.
Trump announced a 60% tariff on imports from China and a 10% tariff on imports from the rest of the world during his campaign for a second term.
“Mr. Trump’s re-election should be a negative for Chinese stocks as Mr. Trump supports the idea of imposing much higher tariffs on U.S. imports from China,” said Tomo Kinoshita, global market strategist at Invesco Asset Management in Japan. “In this regard, Japanese stocks with significant exposure to the Chinese market are likely to be hurt if Mr. Trump wins.”
Encryption support
Trump has shown his support for the cryptocurrency industry in recent weeks by meeting with top industry executives and promising that he will ensure that all future bitcoin mining takes place in the United States.
That makes Solana — the fifth-largest cryptocurrency with a market cap of about $67 billion, according to CoinMarketCap — a potential beneficiary of Trump’s return to the White House. Asset managers VanEck and 21Shares have filed for exchange-traded funds that would invest directly in the digital currency.
While many see the idea as unlikely to be approved, the prevailing thinking among some market participants is that a recently re-elected Trump will appoint a more pro-crypto SEC chairman than Biden’s Gary Gensler. That outcome would make a Solana ETF—and a corresponding surge in the token’s value—more likely.
The possibility of changes in the Democratic ticket is also likely to boost Bitcoin, according to Stephane Ouellette, CEO of FRNT Financial.
“The crazier the American political system looks, the better Bitcoin looks,” Ouellet said. “That’s the kind of atmosphere Bitcoin might be headed toward. The craziness in the American political system is a pro-Bitcoin factor.”
–With assistance from Jean-Patrick Barnert, Natalia Knyazevich, Ruth Carson, Bree Bradham, Nazmul Ahsan, Winnie Hsu, Carter Johnson, Veldana Hajric, Liz Kabo McCormick, Yi Shi, Emily Nicole, Katie Greifeld, Edward Bolingbroke and Anya Andrianova.
(Adds section on Asian influence)
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