(Bloomberg) — Kamala Harris’s growing popularity in U.S. polls and the increasing likelihood that the Federal Reserve will soon cut interest rates are a double blow to the so-called Trump trades.
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In the 11 days since President Joe Biden declared he would not seek a second term and Democrats united behind Vice President Harris’s candidacy, strategies that capitalized on a Donald Trump victory have lost steam. The dollar has stagnated, Treasuries have risen, and Bitcoin has fallen.
Polls now suggest a tie between Harris and Trump in swing states, giving markets a stark reminder about the risk of betting on political events. Just weeks ago, an assassination attempt and doubts about Biden’s age were seen as helping Trump, who is reportedly embracing looser fiscal policy, higher trade tariffs and softer financial regulations if he returns to the White House.
“We’ve seen some of the Trump trades unwind,” Neeraj Seth, chief investment officer and head of APAC fundamental fixed income at BlackRock, said Thursday on Bloomberg Television. “We’re going to go back and forth between now and November 5.”
Markets aren’t just reacting to the election outlook. Fed Chair Jerome Powell acknowledged this week that the central bank could cut rates in September, which is also prompting investors to favor Treasuries and doubt the dollar. Those signals are likely to irritate Trump, who recently told Bloomberg Businessweek that cutting rates just weeks before the vote is something officials “know they shouldn’t do.”
What Bloomberg Strategists Say…
“Investors have been given a cautionary lesson about the dangers of underestimating how quickly political landscapes can change. The most likely outcome, especially with the Fed putting a rate cut on the table for its next meeting, is that US politically-related trading will fall asleep until late September.”
— Garfield Reynolds, MLIV Asia Team Leader. Click here for more
Below is a summary of Trump’s transactions:
Bond trading
The focus in the world’s largest bond market has been more on monetary policy than politics lately. Treasuries rallied to close out a third straight month of gains in July — the longest winning streak for U.S. bonds in three years — after Powell spoke on Wednesday.
That runs counter to a version of the Trump deal that said the Republican’s return to the White House would likely lead to tax cuts and an increase in the national debt, casting a shadow over longer-term Treasuries.
A favorite way to express those concerns, via bets on a steeper yield curve, remains a good bet for traders, however, thanks to the Fed’s shift toward austerity. A dovish Fed is likely to support a so-called bull steepener, in which short-term Treasuries rise more than longer-dated bonds.
BlackRock’s Seth sees the Fed’s policy path as “more important” from a 12- to 18-month time horizon, rather than trying to speculate on how the election will go.
“We are moving towards an easing cycle, that is unequivocal,” he said.
Dollar
Since Biden withdrew from the race, the US dollar benchmark has stagnated.
Some traders had bet that the dollar would recover if Trump won, as it would benefit from a pre-election haven and then from trade tariffs.
But that bet became a lot more complicated when Trump argued last month that a highly valued dollar is a “huge burden” on American businesses and picked staunch dollar skeptic and Ohio Senator J.D. Vance as his running mate.
About two-thirds of respondents to a Bloomberg MLIV Pulse survey conducted July 22-26 said they expected a second Trump term would ultimately undermine the dollar as the world’s reserve currency. Still, 26% saw the dollar as the best haven against volatility if he were to win.
Given the competing impulses, the Fed’s shift is likely to be the most consequential driver for the dollar going forward. The Bloomberg Dollar Spot Index suffered its worst day in more than two months on Wednesday as Powell reaffirmed the central bank’s growing preference for easing.
A softer dollar is “the path of least resistance until the election outcome reduces the uncertainty surrounding post-election trading,” Steven Englander, head of global G-10 FX research at Standard Chartered, wrote on Thursday.
Shares
Prison companies GEO Group Inc. and CoreCivic Inc. are expected to benefit from a Republican victory, given Trump’s hardline stance on immigration.
But their shares have fallen since Biden dropped out of the race.
In contrast, gun stocks like Smith & Wesson Brands and Sturm Ruger & Co. have performed well so far.
Bank stocks, seen as a key potential beneficiary of a Trump administration because of optimism about regulatory easing, largely held on to their July gains amid rotational trading in the broader market.
Meanwhile, Trump Media & Technology Group Corp., the parent company of Truth Social, has fallen 18% since July 21. The stock has seen some wild swings lately amid election headlines.
China risk
Against all odds, the yuan is set to take a hit as Trump’s trades gain traction, with the offshore unit strengthening 1% against the dollar in July — its best performance since November. Recent gains in the yuan have been partly driven by a rise in the yen, with the two currencies increasingly moving in lockstep.
Investors agree that Chinese assets are at risk regardless of who wins the election, though they are likely to fare worse under Trump. The former president has suggested imposing 60% tariffs on imports from China and 10% duties on the rest of the world.
Harris could continue existing national security and industrial policy measures that target the world’s second-largest economy. The developments could benefit regions such as India and defensive stocks such as Asian REITs, which are less exposed to trade risks and could benefit from a lower interest rate environment, said Ray Sharma-Ong, head of multi-asset investment solutions for Southeast Asia at abrdn.
Cryptocurrency
Growing doubts about whether Trump will get the chance to implement his pro-crypto agenda have undermined Bitcoin in recent days.
The original cryptocurrency has become something of a benchmark for Trump’s chances of returning to the White House, after he vowed 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 left office.
Kyle Doane, head of trading at Arca, said some of Bitcoin’s recent weakness could be due to Harris “moving higher in the polls.”
Harris Trade
In contrast to the Trump trade, strategies tied to a Harris victory have been less touted so far. With expectations that she will inherit the Biden administration’s policy positions, market watchers are placing more weight on macro drivers.
“We would favor a more bullish positioning on Asian equities on an uncovered basis if Harris wins, as Harris is unlikely to introduce major inflation shocks to the global economy,” said Homin Lee, senior macro strategist at Lombard Odier Singapore Ltd. “The key factors driving ongoing disinflation in the U.S. will remain in place.”
For abrdn Plc, the Harris trade has yet to happen as it is not yet clear what the US Congress will look like.
“Should we see a blue wave in Congress, we expect Democrats to push for the reinstatement of their pandemic-era child tax credits and a corporate tax hike,” Sharma-Ong said. “This will put a damper on corporate profits and markets will favor stocks with strong margins.”
For some, it’s still too early to trade with Harris.
“Her lead so far is not due to anything she has done, but rather the fact that nothing has been done or initiated yet, which leaves room for optimism,” said Hebe Chen, an analyst at IG Markets in Melbourne.
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