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Investors are starting the week scrambling to decide if President Joe Biden\u2019s decision to end his reelection campaign and endorse Vice President Kamala Harris increases or decreases Donald Trump\u2019s chances of regaining power.\u00a0<\/p>\n
The earliest opportunity for traders to respond comes as trading in currency markets picks up in Asia\u2019s Monday session. The US dollar was quoted lower against the Swiss franc and the Australian dollar in Sydney.\u00a0<\/p>\n
\u201cThe first order impact of this announcement should be more uncertainty which typically puts markets in a risk off mode \u2013 with a selloff in equities and a flight\u2014to-quality bid coming through.\u201d said Zachary Griffiths, head of US investment grade and macro strategy at CreditSights.<\/p>\n
In the weeks since a disastrous debate ignited concerns over 81-year old Biden\u2019s ability to serve another term, financial markets downgraded his chances of success. They\u2019ve generally favored trades seen benefiting from Republican Trump\u2019s advocacy of looser fiscal policy, higher trade tariffs and weaker regulations.\u00a0<\/p>\n
That\u2019s taken the form of support for the dollar, rising US bond yields and gains in bank, health and energy stocks as well as Bitcoin.<\/p>\n
The question for investors is whether to stick with such trades now that Biden has dropped his bid for reelection. Markets may be jumpy as traders wait to see if Harris secures her party\u2019s nomination and weigh if she can then gather enough momentum to challenge Trump\u2019s lead in the polls.\u00a0<\/p>\n
\u201cInvestors should expect a spike in volatility,\u201d Dave Mazza, chief executive officer of Roundhill Financial, said before Sunday\u2019s announcement. \u201cIf Vice President Harris can mobilize quickly to give Trump a material run, then we should expect volatility to linger. However, if Trump continues to pull ahead in the polls and investors view his win as inevitable, then the \u2018Trump Trade\u2019 will take over and volatility will decline.\u201d<\/p>\n
There is little historical data to use for a read on how markets will react. The most recent example of a sitting president not seeking a second term was Lyndon Johnson in 1968.<\/p>\n
A fresh Democratic ticket means \u201cTrump trades would wobble as markets recalibrate the odds,\u201d Grace Fan, managing director of global policy research at GlobalData. TS Lombard, wrote in a July 17 note. Those wagers are \u201care unlikely to budge much,\u201d however, if Harris is the eventual candidate, she said.\u00a0<\/p>\n
The dollar is generally expected to get a boost if another Trump presidency looks more likely. Trump\u2019s preferred mix of low taxes and high tariffs are seen as spurring inflation and interest rates, adding to the dollar\u2019s appeal. The currency also experiences higher demand in periods of uncertainty thanks to its haven status.<\/p>\n
Potential losers in the face of a rising dollar include the Mexican peso and Chinese yuan.<\/p>\n
Still, the dollar fell against the yuan and Japanese yen last week after Bloomberg Businessweek published a June interview with Trump in which he noted a strong greenback had hurt American competitiveness, a point also made in the past by his running mate, JD Vance.<\/p>\n
\u201cWe do not think this is the right trade,\u201d strategists from Barclays<\/a> Plc said in a Sunday report. \u201cA second Trump term would imply further dollar strength, in our view, and the recent dip provides good levels to re\u200b-\u200bengage with our recommended longs\u201d such as the dollar against the yuan.\u00a0<\/p>\n The conclusion that Trump spells inflation has also seeped into the world\u2019s biggest bond market, with traders embracing a wager that involves buying shorter-maturity notes and selling longer-term ones \u2014 known as a\u00a0steepener trade<\/a>.\u00a0<\/p>\n \u201cAs Harris\u2019s odds have risen, so have the Democratic odds of winning the House,\u201d said Steven Englander, a strategist at Standard Chartered<\/a> Bank in New York. \u201cIf this is how it plays out, then fears of further fiscal stimulus may wane and take some pressure off rates and the US dollar. But it is still very early days on what may be a very different campaign than expected even two weeks ago.\u201d<\/p>\n Spreads<\/a>\u00a0on US high-yield bonds have also strengthened compared with their euro counterparts in the past week and junk funds globally saw a surge in inflows, in positioning that may stand to benefit from a potential Trump victory.<\/p>\n What Bloomberg\u2019s Strategists Say\u2026<\/strong><\/p>\n \u201cUnless there is a material change to Trump\u2019s chances, traders will likely position for dollar weakness as there could be more verbal attacks against weak foreign currencies leading into November. Meanwhile, Treasuries will have a more nuanced outlook. Curve steepening is likely to extend amid concerns about larger deficits, but within a framework of falling yields as the Federal Reserve moves toward its first interest rate cut this year.\u201d<\/p>\n \u2014 Mark Cranfield,\u00a0\u00a0<\/em>Markets Live Strategist<\/p>\n<\/blockquote>\n The potential for a Republican victory has bolstered parts of the market expected to get support from Trump\u2019s lighter regulatory touch or views on oil and immigration.\u00a0<\/p>\n Trump in June told Senate Republicans he would restart oil drilling in Alaska\u2019s Arctic National Wildlife Refuge\u00a0if elected<\/a>, reversing a move by the Biden administration to cancel leases in the frozen wilderness.\u00a0<\/p>\n \u201cI like commodities and commodity-related stocks because I do think the geopolitical risk has increased recently as some adversaries\/competitors may view it as weakness and try and take advantage of what they perceive as confusion in the US,\u201d said Peter Tchir, head of macro strategy at Academy Securities.\u00a0<\/p>\n Renewables and consumer discretionary sectors \u201ccould suffer\u201d if Trump wins the presidency with a Republican Congress, Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management, wrote in a note last month.\u00a0<\/p>\n Private prison stocks like GEO Group<\/a> Inc. and CoreCivic<\/a> Inc. have been on the rise given Trump\u2019s tough-on-immigration views.<\/p>\n Some sectors seen as benefiting from potentially less regulatory pressure under a Trump administration are health insurers, like UnitedHealth Group<\/a> Inc. and Humana<\/a> Inc., and banks.\u00a0<\/p>\n A second Trump term would ease regulatory and reimbursement headwinds weighing on the managed care stocks, RBC Capital Markets analyst Ben Hendrix said last month.\u00a0<\/p>\n Within financials, Trump has made overtures to Bitcoin miners. In June, the former president met with the industry\u2019s executives, saying he loves cryptocurrency and\u00a0would advocate<\/a>\u00a0for miners. Shares of Bitcoin miners such as CleanSpark Inc. and Riot Platforms Inc. could be in focus.<\/p>\n Sectors that have reacted to Democratic prospects while Biden was in the race included cannabis stocks and renewable energy shares, and this may remain the case now that he\u2019s out.\u00a0<\/p>\n The Department of Justice in May\u00a0started the process<\/a>\u00a0of reclassifying cannabis as a less dangerous substance, providing an immediate jolt to the industry. The momentum has since then faded, and the AdvisorShares Pure US Cannabis ETF has lost about 10% since Biden\u2019s debate debacle in late June.\u00a0<\/p>\n The Biden administration\u2019s support for electrification and blue and green hydrogen production has been a boon for clean-energy stocks. A November election win for Donald Trump will threaten $369 billion in US clean energy initiatives from the Biden administration\u2019s landmark climate law, an analysis compiled by Bloomberg Intelligence\u00a0shows<\/a>.<\/p>\n<\/div>\n\n
Energy, Prison Stocks\u00a0<\/h3>\n
Health Insurers, Bitcoin Miners<\/h3>\n
Cannabis, Renewables\u00a0<\/h3>\n