(Bloomberg) — As the world’s financial markets reopened after the attempted assassination of Donald Trump, one thing seemed likely: Trump trading will gain even more momentum.
Most read from Bloomberg
The series of bets — based on expectations that the Republican’s return to the White House would lead to tax cuts, higher tariffs and looser regulations — had already gained traction since President Joe Biden’s poor performance in last month’s reelection campaign debate brought danger.
But the dealings were expected to cut deeper, with Trump energizing his supporters and drawing sympathy by showing defiant resilience after being shot in the ear on stage at a rally in Pennsylvania.
The dollar – which would rise if accommodative fiscal policy keeps bond yields high – started moving higher against most peers early in Asian trading. Bitcoin rose above $60,000, possibly reflecting Trump’s crypto-friendly stance.
“For us, the news that Trump is the frontrunner is reinforced,” said Mark McCormick, global head of currency and emerging markets strategy at Toronto Dominion Bank. “We remain a bull in the US dollar for the second half and early 2025.”
The specter of political violence in the US could lead investors to turn to safe assets, overshadowing some of the positioning already underway around the presidential campaign.
Treasuries tend to rally as investors seek temporary safety, which could disrupt Trump’s trading in the bond market, which hinges on the bet that the yield curve will steepen as long-term bonds underperform on expectations that Trump’s fiscal and trade policies will fuel inflationary pressures. . Additionally, some investors may want to book early profits or be wary of diving deeper into an already crowded position.
“Political risk is binary and difficult to hedge, and uncertainty was high given the close nature of the race,” said Priya Misra, portfolio manager at JPMorgan Investment Management.
“This contributes to volatility. I think it further increases the chances of a Republican victory,” she said, adding that “the pressure on the curve could continue to increase.”
Stock investors are preparing for at least a jump in near-term volatility when S&P 500 futures begin trading in New York at 6 p.m.
While traders generally don’t expect Trump’s assassination attempt to derail stock market performance in the long term, an uptick in price swings is likely in the short term. The market is already grappling with speculation that valuations have become too high given the boom in artificial intelligence stocks and the risks associated with higher interest rates and political uncertainty.
But investors also expected banking, healthcare and oil stocks to benefit from a Trump victory.
“The unprecedented nature of the attack will increase volatility,” said David Mazza, CEO of Roundhill Investments, predicting that investors could seek temporary safety in defensive stocks such as mega-cap companies. He said it “also adds support to stocks that are doing well in a steepening yield curve, especially financials.”
The early reaction reflects what was seen after the first presidential debate in late June, when Biden’s weak performance was seen to boost Trump’s election chances.
The dollar rose on that event, and investors quickly began embracing a bet of buying shorter-term notes and selling longer-term notes – known as a steepening trade. This trade is paying off: prior to the debate, the yield on 30-year government bonds rose from approximately 37 basis points to almost 5 basis points below the 2-year yield.
“If the market feels that Trump’s chances of winning are better 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,” says Michael Purves, CEO and founder of Tallbacken Capital Advisors, wrote in an email.
While bond traders have priced in at least two rate cuts in 2024, a big jump in Trump’s election chances could prompt the Federal Reserve to stay on hold longer, Purves said.
“Trump’s policies are (at least now) more inflationary than Biden’s,” he wrote, “and we think the Fed will want to accumulate as much dry energy as possible.”
–With assistance from Liz Capo McCormick, Isabelle Lee, Sid Verma, Edward Dufner, Esha Dey, and Michael G. Wilson.
Most read from Bloomberg Businessweek
©2024 BloombergLP