Investors should start the week wondering whether President Joe Biden’s decision to end his re-election campaign and endorse Vice President Kamala Harris increases or decreases Donald Trump’s chances of regaining power.
The first opportunity for traders to react comes as trading in foreign exchange markets resumes during the first session on Monday in Asia.
Since a disastrous debate revived concerns about the ability of 81-year-old Joe Biden to serve another term, financial markets have downgraded his chances of victory. They have generally favored stocks that appear to benefit from Trump’s policies of looser fiscal policy, higher tariffs and more relaxed regulation.
That translated into support for the dollar, rising U.S. bond yields and gains in banking, healthcare and energy stocks as well as Bitcoin.
The question for investors is whether they should continue to invest in these types of positions now that Biden has dropped his re-election bid. Markets could be jittery as traders wait to see if Harris secures her party’s nomination and assess whether she can then muster enough momentum to challenge Trump’s lead in the polls.
“Investors should expect volatility to increase,” Dave Mazza, managing director at Roundhill Financial, said ahead of Sunday’s announcement. “If Vice President Harris can quickly mobilize to give Trump a significant chance, then we should expect volatility to persist. However, if Trump continues to pull ahead in the polls and investors view his victory as inevitable, then the Trump Trade will take over and volatility will decrease.”
There is little historical data to gauge how markets will react. The most recent example of a sitting president not seeking a second term was Lyndon Johnson in 1968.
A new Democratic team means “Trump bets could wobble as markets reassess probabilities,” Grace Fan, managing director of global policy research at GlobalData.TS Lombard, wrote in a July 17 note. Those bets “are unlikely to budge much,” if Harris ultimately wins, she added.
Bonds and currencies
The dollar is likely to get a boost if the prospect of another Donald Trump presidency becomes more pressing. Donald Trump’s preferred combination of low taxes and high tariffs is seen as a source of inflation and interest rates, which adds to the dollar’s appeal. The currency also sees higher demand in times of uncertainty due to its safe-haven status.
The potential losers from a rising dollar are the Mexican peso and the Chinese yuan.
However, the dollar fell against the yuan and the Japanese yen last week after Bloomberg Businessweek published an interview with Trump in June in which he noted that a strong greenback had hurt U.S. competitiveness, a point also made in the past by his running mate, J.D. Vance.
“We don’t think this is the right strategy,” Barclays Plc strategists said in a report released Sunday. “A second Trump term would imply further dollar strength in our view, and the recent decline provides good levels to re-engage with our recommended long positions,” such as the dollar against the yuan.
The conclusion that Trump means inflation has also seeped into the world’s largest bond market, with traders engaging in a gamble of buying shorter-dated bonds and selling longer-dated ones – known as a steepener trade.
“Harris’s chances of winning the House have increased, as have the Democrats’,” said Steven Englander, a strategist at Standard Chartered Bank in New York. “If that plays out, fears of further fiscal stimulus could ease and ease pressure on rates and the U.S. dollar. But it’s too early to talk about a campaign that could look very different than what was expected just two weeks ago.”
What Bloomberg strategists say…
“Unless Donald Trump’s odds change materially, traders will likely position for dollar weakness as verbal attacks on weaker foreign currencies could intensify through November. Meanwhile, the outlook for Treasuries will be more nuanced. The curve is likely to continue steepening on concerns of rising deficits, but against a backdrop of falling yields as the Federal Reserve heads toward its first rate cut this year.”
— Mark Cranfield, Live Market Strategist
Energy, prison stocks
The possibility of a Republican victory has bolstered parts of the market that are expected to benefit from Trump’s lighter regulation or his views on oil and immigration.
In June, Trump told Republican senators he would restart oil drilling in the Arctic National Wildlife Refuge in Alaska. if electedreversing a Biden administration decision to cancel leases in the frozen wilderness.
“I like commodities and commodity-related stocks because I think geopolitical risk has increased recently as some adversaries/competitors may view it as a weakness and try to take advantage of what they perceive as confusion in the U.S.,” said Peter Tchir, head of macro strategy at Academy Securities.
The renewable energy and consumer discretionary sectors “could suffer” 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.
Shares of private prisons such as GEO Group Inc. and CoreCivic Inc. are rising given Trump’s tough stance on immigration.
Health insurance, Bitcoin miners
Some sectors seen as potentially benefiting from less regulatory pressure under a Trump administration are health insurers, such as UnitedHealth Group Inc. and Humana Inc., and banks.
A second Trump term would ease regulatory and reimbursement headwinds weighing on managed care stocks, RBC Capital Markets analyst Ben Hendrix said last month.
In the financial sector, Trump has made overtures to Bitcoin miners. In June, the former president met with industry executives, saying he loved cryptocurrency and would recommend for miners. The actions of Bitcoin miners such as CleanSpark Inc. and Riot Platforms Inc. could be in focus.
Cannabis, renewable energies
Sectors that reacted to the Democratic outlook while Biden was in the race included cannabis stocks and renewable energy stocks, and that could remain the case now that he is out.
The Ministry of Justice in May started the process The move reclassified cannabis as a less dangerous substance, giving the industry an immediate boost. The momentum has since faded, and the AdvisorShares Pure US Cannabis ETF is down about 10% since the Biden debate debacle in late June.
The Biden administration’s push for electrification and blue and green hydrogen production has been a boon to clean energy stocks. A Donald Trump election victory in November would threaten $369 billion in U.S. clean energy initiatives stemming from the Biden administration’s landmark climate law, according to an analysis compiled by Bloomberg Intelligence. watch.
