Global markets on alert over Biden exit as speculation grows over Trump victory

(Bloomberg) — The heated debate in Washington over whether President Joe Biden will abandon his re-election bid is spilling over to Wall Street, where traders are putting money into the dollar, Treasuries and other assets that would be affected by Donald Trump’s return to office, or vice versa.

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The recalibration of portfolios began late last week after Biden’s disastrous debate with Trump heightened fears that the 81-year-old Democrat was too old to serve another term. Trading activity afterward was strongest 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 might drop out of the race—betting markets estimate his chances of remaining a candidate are less than 50 percent—investors are rushing to make contingency plans to respond to such an announcement on Thursday, the July 4 Independence Day holiday, and the following weekend.

One fund manager, who asked not to be named because of the sensitivity of the issue, said he was heading into the holiday period with a preference for the dollar and short-term debt to hedge against the increase in risk that he believes a Biden exit would trigger. No president has opted not to run for a second term since Lyndon Johnson in 1968, and the election is just four months away.

“Markets have already reassessed the election chances since the debate, so the news of the last 24 hours has only added fuel to the fire,” said Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities in New York.

Traders and strategists agree: A re-election of the 78-year-old Republican Trump would boost trade, which benefits from an inflationary mix of loose fiscal policy and stronger protectionism: a strong dollar, higher yields on U.S. bonds and gains in banking, healthcare and energy stocks.

Even 10,000 miles away in Sydney, people are bracing themselves. Rodrigo Catril, a strategist at National Australia Bank, said “everyone” is preparing trade plans in case Biden ends his campaign.

“Either way, the market is betting on Trump to win the election,” Catril said. “It seems that the Democrats are facing very difficult choices, none of which are easy and none of which will lead to a better outcome.”

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This is how the so-called Trump trade materializes on the markets:

Dollar signal

The dollar gave one of the earliest signals of how markets would prepare for a potential Trump victory, gaining in the hours after last week’s debate. While the greenback was boosted this year by hints from the Federal Reserve that it intends to keep interest rates higher for longer, the currency received a significant boost in real time as Trump dominated the confrontation with Biden.

“A Trump victory brings with it the prospect of higher inflation and a stronger dollar, given his promises of higher tariffs and a tougher stance on immigration,” said JPMorgan Chase & Co. strategists led by Joyce Chang.

Potential losers in the face of a rising dollar and Trump’s expected support for tariffs include the Mexican peso and the Chinese yuan.

Yield curve trading

In the wake of the debate, asset managers in the $27 trillion U.S. Treasury market responded by buying shorter-dated securities and selling longer-dated ones – a bet known as the “steepener trade.”

A number of Wall Street strategists, including Morgan Stanley and Barclays Plc, have touted the strategy, urging their clients to prepare for stubborn inflation and higher long-term yields in another Trump term.

In the space of two days since the end of last week, 10-year Treasury yields have risen by around 13 basis points relative to 2-year Treasury yields, representing the steepest curve steepening since October.

Signs that traders are bracing for near-term volatility in the Treasury market were evident on Wednesday from a buyer of a so-called strangle structure that benefits from an upward or downward move in futures above strike prices. In addition to potential risk over the holiday weekend related to Biden’s candidacy, the expiry also includes Friday’s U.S. jobs data and Fed Chair Jerome Powell’s testimony next week.

Stock gains

The prospect of a Trump victory has boosted countless stocks that are likely to benefit from his perceived views on the regulatory environment, mergers and trade relations, and the broader market has rallied in the wake of the debate.

The turnaround in the election campaign since last week “has led to higher stock prices as Republicans are generally seen as more business-friendly,” said Tom Essaye, president and founder of Sevens Report.

Health insurers UnitedHealth Group Inc. and Humana Inc. and banks are expected to benefit from looser regulations. Discover Financial Services and Capital One Financial Corp. are among the credit card companies whose shares have risen on optimism about Trump, given the impending deal between the two companies and speculation about possible changes to rules on late fees.

Energy stocks such as Occidental Petroleum Corp. rose after the debate, as the former president is seen as a pro-oil politician. Shares of private prisons such as GEO Group Inc. reacted to his perceived tough stance on immigration policy.

ETFs for financials

The exchange-traded fund market has recently shown a clear investment strategy: Long is betting that Trump will push for deregulation and a steepening curve of U.S. Treasuries thanks to his potentially inflationary agenda.

The Financial Select Sector SPDR Fund (ticker symbol XLF), a $40 billion fund, saw its largest inflow in more than two months last week, with investors contributing about $540 million and $611 million so far this week amid recent fluctuations in the interest rate market.

Meanwhile, a thematic investment strategy designed to build on the Trump transactions has struggled to gain traction. An ETF with the eye-catching ticker symbol MAGA that invests in Republican-friendly stocks has been slow to accumulate funds and has seen no significant inflows this year, data compiled by Bloomberg show.

Asian influence

The Asian markets are also not immune to speculation, as tensions between the US and China are simmering and tariffs are looming.

As part of his campaign for a second term, Trump has considered imposing 60 percent tariffs on imports from China and 10 percent tariffs on imports from the rest of the world.

“Mr Trump’s re-election is likely to have a negative impact on Chinese equities as Mr Trump supports the idea of ​​imposing significantly higher tariffs on US imports from China,” said Tomo Kinoshita, global market strategist at Invesco Asset Management Japan. “In this regard, Japanese equities with high exposure to the Chinese market are likely to suffer if Mr Trump wins.”

Crypto support

Trump has shown his support for the crypto industry in recent weeks by meeting with industry executives and promising that he would ensure that all Bitcoin mining would be conducted in the United States.

This makes the Solana token – the fifth-largest cryptocurrency with a market capitalization of around $67 billion according to CoinMarketCap – a potential beneficiary of a Trump return to the White House. Asset managers VanEck and 21Shares have applied for ETFs that would invest directly in the digital currency.

While many consider approval unlikely, some market participants believe that a newly re-elected Trump would appoint a Securities and Exchange Commission chairman who is more crypto-friendly than Gary Gensler was under Biden, an outcome that would make a Solana ETF—and a corresponding rally in the token—more likely.

According to Stephane Ouellette, CEO of FRNT Financial, the prospect of a shakeup of the Democratic nomination slate is also likely to give Bitcoin a boost.

“The crazier the U.S. political system looks, the better Bitcoin looks,” Ouellette said. “That’s the kind of sentiment Bitcoin would go for. The insanity in the U.S. political system is a pro-Bitcoin factor.”

– With support from Jan-Patrick Barnert, Natalia Kniazhevich, Ruth Carson, Bre Bradham, Nazmul Ahasan, Winnie Hsu, Carter Johnson, Vildana Hajric, Liz Capo McCormick, Ye Xie, Emily Nicolle, Katie Greifeld, Edward Bolingbroke, and Anya Andrianova.

(Adds a section on Asian influence)

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