As world financial markets started to reopen after the attempted assassination of Donald Trump, one thing seemed likely: The Trump trade will get even more momentum.
The series of wagers – based on anticipation that the Republican’s return to the White House would usher in tax cuts, higher tariffs, and looser regulations – had already been gaining ground since President Joe Biden’s poor performance in last month’s debate imperiled his re-election campaign.
But the trades were expected to take deeper hold, with Trump galvanizing supporters and drawing sympathy by exhibiting defiant resilience after being shot in the ear on stage at a Pennsylvania rally.
The dollar – which would gain if loose fiscal policy kept bond yields elevated – started to move higher against most peers early in Asia trading, with the Mexico peso leading the slide, weakening 0.3%. Bitcoin rose above $60,000, potentially reflecting Trump’s crypto-friendly stance, while futures on the S&P 500 Index for September rose 0.2% at 08:47 p.m. in New York.
“For us, the news does reinforce that Trump’s the frontrunner,” said Mark McCormick, global head of foreign-exchange and emerging-market strategy at Toronto Dominion Bank. “We remain US dollar bulls for the second half and early 2025.”
To be sure, there’s still plenty of room for surprises with almost four months to go in the US election campaign. The emergence of political violence may deepen concern about instability in the US and push investors into haven assets, potentially overshadowing some of the market positioning that has already taken place in the run-up to the election.
While future contracts on 10-year Treasury notes for September showed declines in early Asia trading, US government bonds tend to rally when investors seek temporary safety, so that may distort the Trump trade in the Treasuries market, which hinges on wagering that the yield curve will steepen as long-term bonds underperform on anticipation that Trump’s fiscal and trade policies will fan inflation pressures.
Moreover, some investors may want to book early gains or be wary of getting deeper into an already crowded position.
“Political risk is binary and hard to hedge, and uncertainty was high as it is with the close nature of the race,” said Priya Misra, a portfolio manager at JPMorgan Investment Management.
“This adds to volatility. I think it further increases the chance of a Republican sweep,” she said, adding that “could put steepening pressure on the curve.”
Equity investors are preparing for at least a near-term jump in volatility when S&P 500 futures start trading at 6 p.m. in New York.
While traders generally don’t expect Trump’s assassination attempt to derail the stock-market trajectory in the long run, a pick-up in near-term price swings is likely. The market has already been contending with speculation that valuations have become too stretched, given the boom in artificial-intelligence stocks and the risks posed by elevated interest rates and political uncertainty.
But investors have also been anticipating that bank, health-care and oil-industry stocks would benefit from a Trump victory.
“The attack will boost volatility,” said David Mazza, CEO at Roundhill Investments, predicting investors could seek temporary safety in defensive stocks like mega-cap companies. He said it “also adds support for stocks that do well in a steepening yield curve, especially financials.”
The early reaction echoes what was seen after the first presidential debate in late June, when Biden’s weak performance was seen as fueling Trump’s election odds.
The dollar advanced during that event, and investors soon began embracing a wager that involves buying shorter-maturity notes and selling longer-term ones – known as a steepener trade. That trade has been paying off, with the 30-year Treasury yields jumping to nearly 5 basis points below 2-year ones from around 37 basis points below ahead of the debate.
“If the market sense that Trump’s chances to win are higher than they were on Friday – then we would expect the back end of the bond market to sell off in the manner we saw in the immediate aftermath of the debate,” Michael Purves, CEO and founder of Tallbacken Capital Advisors, wrote in an email.
While bond traders have been pricing in at least two interest-rate reductions in 2024, a major boost in Trump’s election odds could push the Federal Reserve toward staying on hold for longer, according to Purves.
“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 power as possible.”
