(Bloomberg) — The surging popularity of Kamala Harris in US election polls and soaring odds the Federal Reserve will soon start cutting rates of interest is dealing a double-blow to the so-called Trump trades.
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Inside the 11 days since President Joe Biden declared he wouldn’t seek a second term and Democrats united behind the candidacy of Vice President Harris, strategies seen benefiting from a win by Donald Trump have lost steam. The dollar has stagnated, Treasuries have rallied and Bitcoin has slid.
Polls now suggest a dead heat between Harris and Trump in swing states, handing markets a harsh reminder on the danger of betting on political events. Just weeks ago, an assassination attempt and doubts over Biden’s age were seen as helping Trump, who’s seen embracing looser fiscal policy, higher trade tariffs and softer financial regulation if he returns to the White House.
“We now have seen some Trump trades unwinding,” Neeraj Seth, chief investment officer and head of APAC fundamental fixed income at BlackRock, said in a Bloomberg Television on Thursday. “We’ll go backwards and forwards between now and the fifth of November.”
The markets aren’t solely reacting to the electoral outlook. Fed Chair Jerome Powell acknowledged this week the central bank could pare rates in September, also pushing investors to favor Treasuries and doubt the dollar. That signaling is more prone to annoy Trump, who recently told Bloomberg Businessweek a rate cut just weeks before the vote is something officials “know they shouldn’t be doing.”
What Bloomberg’s Strategists Say…
“Investors have received a cautionary lesson within the risks of underestimating how rapidly political landscapes can shift. The more likely final result, especially with the Fed putting a rate cut on the table for next meeting, is for trades tied to US politics to go to sleep until September ends.”
— Garfield Reynolds, MLIV Asia team leader. Click here for more
Here’s a rundown of how the Trump trades are faring:
Bond Trades
Concentrate on the earth’s biggest bond market has recently been more tied to monetary policy then politics. Treasuries rallied to cap a third-straight month of gains in July — the longest winning streak for US bonds in three years — after Powell spoke on Wednesday.
That runs counter to no less than one iteration of the Trump trade, which posits the Republican’s return to the White House would likely end in tax cuts and add to the national debt, casting a shadow over longer-dated Treasuries.
Nonetheless, a favorite approach to precise that concern, via bets on a steeper yield curve, stays play for traders due to the Fed’s shift toward cuts. An easing Fed is more prone to support a so-called bull steepener, where short-dated Treasuries rally greater than bonds with further-out maturities.
BlackRock’s Seth sees the Fed policy path as “more crucial” from a 12-to-18 month time horizon, moderately than attempting to take a position on where the elections are going.
“We’re moving toward the easing cycle, that’s unambiguous,” he said.
Dollar
A gauge of the US dollar has stalled since Biden pulled out of the race.
Some traders had been wagering that the dollar would rally right right into a Trump victory on the premise that it’d take advantage of a haven bid before the election after which from trade tariffs thereafter.
But that bet got reasonably so much more complicated when Trump weighed in last month to argue that a highly-valued greenback is a “tremendous burden” on US firms, and chosen strong-dollar skeptic and Ohio Senator JD Vance as his running mate.
Roughly two-thirds of respondents to a Bloomberg MLIV Pulse survey conducted between July 22 and 26 said they expected a second term for Trump would ultimately undermine the greenback since the world’s reserve currency. Still, 26% saw the dollar as among the best refuge from volatility if he were to win.
Given the competing impulses, the Fed’s shift is arguably the more consequential driver for the dollar going forward. The Bloomberg Dollar Spot Index suffered its worst day in greater than two months on Wednesday as Powell confirmed the central bank’s growing bias toward easing.
A softer dollar is “the trail of least resistance until the election final result reduces the uncertainty related to post-election trades,” Steven Englander, head of world G-10 FX research at Standard Chartered, wrote Thursday.
Stocks
Prison firms GEO Group Inc. and CoreCivic Inc. are expected to learn in case of a Republican sweep, given Trump’s tough stance on immigration.
But their shares have slid since Biden dropped out of the race.
Against this, gun stocks like Smith & Wesson Brands and Sturm Ruger & Co. are faring well to this point.
Bank stocks — which have been called out as a key potential beneficiary from a Trump administration as a result of optimism for regulatory relief — have largely held on to their July gains amid the broader market’s rotation trade.
Meanwhile, Trump Media & Technology Group Corp., parent of Truth Social, has slumped over 20% since July 21. The stock had seen some wild swings recently amongst all the election headlines.
“What was viewed as a cake walk has turn into very competitive leading many to question whether the Trump Trade was done a bit premature,” said Peak Capital Management CEO Brian Lockhart. “I expect there to be a complete lot of ‘noise’ throughout the markets which will likely mean higher levels of volatility through the election.”
China Risk
Belying expectations the yuan will likely be hammered as Trump trades gather momentum, the offshore unit strengthened 1% against the dollar in July — among the best performance since November. Recent gains throughout the yuan have been partly driven by a surge throughout the yen, with the two currencies increasingly moving in lockstep.
Investors agree that Chinese assets remain at risk regardless of who wins the election, though they’ll likely fare worse under Trump. The previous president has floated slapping 60% tariffs on imports from China and 10% duties from the rest of the world.
Harris may proceed existing national security and industrial policy measures directed against the world’s second-largest economy. The developments can favor regions like India and defensive stocks paying homage to Asia REITs, which might be less exposed to trade risks and stand to learn from a lower rate environment, said Ray Sharma-Ong, head of multi-asset investment solutions for Southeast Asia at abrdn.
Cryptocurrencies
Rising doubt that Trump will get a probability to implement his pro-crypto agenda has undermined Bitcoin in recent days.
The unique cryptocurrency has turn into something of a proxy for Trump’s odds of returning to the White House after he pledged to make the US the “crypto capital of the planet and the Bitcoin superpower.”
Crypto stocks Coinbase Global Inc., Marathon Digital Holdings Inc. and Riot Platforms Inc. have also fallen since Biden dropped out.
Kyle Doane, head of trading at Arca, said a number of of the recent Bitcoin weakness is also on account of Harris “inching up throughout the polls.”
Harris Trade
Unlike the Trump trade, strategies related to a Harris win have been touted less to this point. With the expectation that she’s going to inherit Biden administration’s policy stance, market watchers are placing more weight on macro drivers.
“We’d favor more bullish positioning on Asian equities on unhedged basis if Harris wins, since Harris is unlikely to introduce large inflationary shocks to the worldwide economy,” said Homin Lee, senior macro strategist at Lombard Odier Singapore Ltd. “The core drivers of the continuing disinflation throughout the US will likely be preserved.”
For abrdn Plc, the Harris trade has yet to emerge because it’s not clear what the composition of the US Congress will likely be.
“Should we get a blue wave in Congress, we expect the Democrats to push for the reintroduction of their pandemic-era child tax credits and an increase in corporation tax,” Sharma-Ong said. “This can likely be a drag on the underside line of corporates, and markets will favor stocks with strong margins.”
For some, it’s just too early to play the Harris trade.
“Her lead, for now, isn’t on account of anything she has done but moderately because nothing has been done or initiated, leaving room for optimism to grow,” said Hebe Chen, an analyst at IG Markets in Melbourne.
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