The recent decision by President Joe Biden to withdraw from the presidential race and endorse Vice President Kamala Harris has introduced new uncertainties regarding former President Donald Trump's return to the White House. This shift has caused the once-surging "Trump trade" to show signs of weakening.
On Monday, U.S. Treasury bonds strengthened, with the 10-year yield dropping by one basis point to 4.23%. The dollar index, after an initial drop, rebounded and ended the day down 0.1%. Bitcoin prices remained relatively stable, while gold prices continued to be weak.
Despite minor market fluctuations, many traders believe that Harris running for president with Biden's support reduces Trump's chances of victory. Stuart Kaiser, Citigroup's head of U.S. equity trading strategy, noted in a recent report that Biden's withdrawal is a negative factor for the "Trump trade" and adds uncertainty to the Democratic National Convention in August, bringing the election odds back to a 50/50 baseline expectation.
Ray Attrill, co-head of global foreign exchange strategy at National Australia Bank, predicted that political news in the coming weeks might have a more negative than positive impact on the markets. He suggested that the market might be more hesitant compared to the past month.
Yung-Yu Ma, chief investment officer at BMO Wealth Management, commented that the "Trump trade" might pause until the Democratic candidate becomes clearer. He noted that the event injects more political uncertainty into the market, which could cause some short-term volatility.
Market volatility has indeed increased with the growing uncertainty surrounding the election. The Cboe Volatility Index, often referred to as the "fear gauge," hit its highest level since late April last Friday.
Rafia Hasan, chief investment officer at Chicago's Perigon Wealth, emphasized that markets dislike uncertainty, and the unknown factor of the Democratic candidate is sure to increase investor anxiety. Hasan advised investors to stay on the sidelines as the market reacts to the news in the coming days and weeks.
Trump Trade on Hold, But Not Over?
The "Trump trade" posits that a Trump re-election would result in policies such as tax cuts, increased fiscal spending, and higher tariffs to stimulate the U.S. economy. This trade gained momentum following Biden's disastrous TV debate and an assassination attempt on Trump, coupled with renewed rate cut expectations. Consequently, the dollar weakened, U.S. small-cap stocks surged, long-term Treasuries were sold off, and gold prices hit record highs. Trump's favorable stance on Bitcoin also led to a significant rebound in its price.
However, on Monday, U.S. Treasuries strengthened, Bitcoin prices were relatively unchanged, gold prices remained weak, and the dollar index recouped most of its earlier losses. Stefan Koopman, an analyst at Rabobank, remarked that this shows investors are still cautious about closing their recently established positions. Despite this, Koopman maintained that Trump winning the November election is still his base case.
In Asia, the Nikkei 225 and Korea Composite Stock Price Index both dropped over 1% on Monday, while Australia's S&P/ASX 200 index fell by 0.7%. This might be due to funds reducing their "Trump trade" bets. Takeo Kamai, head of execution services at CLSA Tokyo, noted that investors might still see Trump as having the upper hand, so the overall market landscape hasn't changed significantly. Kamai added that Asian markets would certainly follow the lead of the U.S., the "dominant market."
Cameron Dawson, chief information officer at NewEdge Wealth in New York, admitted that Biden's withdrawal weakened the "Trump trade," but the market would wait for more clarity on the Democratic presidential nominee. Dawson expected a reversal in the "Trump trade" and other trades once more information is available.
David Roche, president of Independent Strategy, mentioned in a report that Harris is likely to get the Democratic nomination. He pointed out that replacing Harris at this juncture would cause greater confusion and raise questions about the existing Biden-Harris campaign funds.
However, Roche also stated that Harris's nomination increases Trump's chances of winning, despite reducing the GOP's likelihood of controlling both the House and Senate.
Harris Enters, A New Race Begins
In contrast, Charles Myers, founder and CEO of Signum Global Advisors, expressed optimism about Harris. In an interview, Myers said Harris becoming the Democratic frontrunner makes the race entirely different. He believed she would be a key driver for women, young people, and Black voters. Myers felt that people would underestimate her.
Harris has already made history as the first woman and Black vice president. If she wins the Democratic nomination, she would be the second woman to run for president after Hillary Clinton. Myers noted that it is premature to declare Trump the winner, as Harris would present a real challenge. Like many on Wall Street, Myers acknowledged that the "Trump trade" carries risks, at least in the short term.
Myers predicted that by the time the Democratic National Convention begins on August 19, Harris would have selected a running mate and would win the nomination with significant momentum, leading in polls over Trump.
Split Government Expectations Rise, Beneficial for Markets
Currently, the U.S. Congress is divided, with the House controlled by Republicans and the Senate by Democrats. Investors typically view a split government as favorable for the market because it prevents either party from enacting major policy changes unilaterally.
Several Democrats warned that Biden's initial refusal to step down led some Democratic donors to close their funding channels, potentially resulting in Democratic losses in the House and Senate races. However, Brij Khurana, a fixed-income portfolio manager at Wellington Management, said before Biden's announcement that his withdrawal would increase the chances of Democrats controlling at least one chamber of Congress.
Khurana stated that a split government would lead to significantly lower Treasury yields than currently observed. Jamie Cox, managing partner at Harris Financial Group, believed the market might reevaluate the previous expectation of a Republican landslide in Congress. Cox suggested that the Senate is likely to remain Republican, but the House could easily be controlled by Democrats.
Jack McIntyre, a fixed-income portfolio manager at Brandywine Global, also saw a split government as a potential outcome, which he considered favorable for the market.
