(Bloomberg) — The heated debate in Washington over whether President Joe Biden will drop his bid for re-election is spilling over to Wall Street, where traders are moving money in and out of the dollar, Treasuries and other assets that would be affected by Donald Trump’s return to office.
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The portfolio rebalancing began late last week after Biden’s disastrous debate with Trump fueled concerns that the 81-year-old Democrat is too old to serve another term. The trading action that followed was most acute in the bond market, where yields on benchmark 10-year Treasuries rose as much as 20 basis points in the days that followed.
With speculation mounting that Biden could withdraw from the race (betting markets put the odds of him remaining the candidate at less than 50%), investors are rushing to make contingency plans to react to such an announcement during the Fourth of July holiday on Thursday and the following weekend.
One fund manager, who spoke on condition of anonymity because of the sensitivity of the topic, said he went into the holiday season with a preference for the dollar and short-term debt as a hedge against the spike in risk he saw as a result of a Biden withdrawal. No president has chosen not to seek a second term since Lyndon Johnson in 1968, and the election is just four months away.
“Markets have already been re-pricing the election odds since the debate, so the news over the past 24 hours has only added fuel to the fire,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.
The consensus among traders and strategists is that a re-election of Trump, a 78-year-old Republican, would lead to investments that benefit from an inflationary mix of looser fiscal policy and more protectionism: a strong dollar, higher U.S. bond yields and gains in banking, healthcare and energy stocks.
Even 10,000 miles away in Sydney, they are preparing. Rodrigo Catril, a strategist at National Australia Bank, said “everyone” was preparing trade plans in case Biden ends his campaign.
“Either way, the market is betting on Trump winning the election,” Catril said. “It looks like Democrats are stuck with very difficult choices, none of them easy, and none of them likely to lead to a better outcome.”
This is how the so-called Trump trade is manifesting itself in the markets:
Dollar signal
The dollar provided one of the first signals of how markets would adjust to a potential Trump victory, gaining in the hours after last week’s debate. While the dollar has gotten a boost this year from the Federal Reserve’s indications that it plans to keep interest rates higher for longer, the currency got a clear boost in real time as Trump dominated the showdown with Biden.
“A Trump victory raises the prospects for higher inflation and a stronger dollar given his promise of more tariffs and a tougher stance on immigration,” said JPMorgan Chase & Co. strategists led by Joyce Chang.
Potential losers from a rising dollar and Trump’s expected support for tariffs include the Mexican peso and the Chinese yuan.
Yield curve trading
After the debate, money managers in the $27 trillion Treasury market responded by buying shorter-dated bonds and selling longer-dated ones, a bet known as a steepener trade.
A host of Wall Street strategists have touted the strategy, including Morgan Stanley and Barclays Plc. They urged clients to prepare for continued inflation and higher long-term bond yields in a new Trump term.
In a two-day period beginning late last week, 10-year yields rose by about 13 basis points versus 2-year yields, the steepest rise in the yield curve since October.
Signs that traders are bracing for near-term volatility in the Treasury market emerged Wednesday, with a buyer of a so-called strangle structure, which profits from a higher or lower move in futures via the strike prices. In addition to potential risk over the Biden candidacy holiday weekend, expiration also includes Friday’s U.S. jobs report and next week’s testimony from Federal Reserve Chair Jerome Powell.
Share profit
The prospect of a Trump victory has bolstered numerous stocks that stand to benefit from his perceived stances on regulation, mergers and trade relations. The broad market has soared in the aftermath of the debate.
The turnaround in the electoral tide since last week has “driven stock prices higher as Republicans are generally seen as more pro-business,” said Tom Essaye, president and founder of Sevens Report.
Health insurers UnitedHealth Group Inc. and Humana Inc. and banks stand to benefit from looser regulations. Discover Financial Services and Capital One Financial Corp. are among the credit card companies bullish on Trump, given the pair’s pending deal and speculation about possible changes to late-fee rules.
Energy stocks such as Occidental Petroleum Corp. rose after the debate, as the former president is seen as a pro-oil investor. Shares in private prisons such as GEO Group Inc. reacted to his perceived tough stance on immigration.
Financial ETFs
The exchange-traded fund market has shown one clear investment strategy of late: long-term investing on the assumption that Trump will encourage deregulation and a steeper Treasury yield curve thanks to his potentially inflationary agenda.
The $40 billion Financial Select Sector SPDR Fund (ticker XLF) saw its biggest inflows in more than two months last week, with investors adding about $540 million. So far this week, they’ve added $611 million amid the latest fluctuations in the rates market.
Meanwhile, a thematic investment strategy designed to ride the Trump trade has struggled to gain traction. An ETF that carries the eye-catching ticker MAGA and invests in Republican-friendly stocks has been slow to amass assets and has not seen material inflows this year, according to data compiled by Bloomberg.
Crypto Support
Trump has shown his support for the crypto industry in recent weeks, meeting with industry executives and promising to ensure all future Bitcoin mining would take place in the US.
That makes the Solana token — the fifth-largest cryptocurrency with a market cap of about $67 billion, according to CoinMarketCap — a potential beneficiary of a Trump return to the White House. Asset managers VanEck and 21Shares have filed for ETFs that would invest directly in the digital currency.
While many consider approval a long shot, some market participants believe a re-elected Trump would appoint a more crypto-friendly Securities and Exchange Commission chairman than Biden’s Gary Gensler. That’s an outcome that would make a Solana ETF — and an accompanying rally in the token — more likely.
According to Stephane Ouellette, CEO of FRNT Financial, the prospect of a shift in the Democratic ticket is also likely to give Bitcoin a boost.
“The crazier the American political system looks, the better Bitcoin looks,” Ouellette said. “That’s the kind of vibe that Bitcoin would go for. Craziness in the American political system is a pro-Bitcoin factor.”
–With assistance from Ruth Carson, Bre Bradham, Nazmul Ahasan, Carter Johnson, Vildana Hajric, Liz Capo McCormick, Ye Xie, Emily Nicolle, Katie Greifeld, Edward Bolingbroke, Anya Andrianova, Jan-Patrick Barnert, and Natalia Kniazhevich.
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