Its Over, page-22814

Why the ‘Trump trade’ just got trickier for investors

More certainty for markets of a Trump victory now might mean more uncertainty later if he sweeps November’s elections.
Jul 15, 2024 – 11.39am


As investors return to their desks surrounded by images of a bloodied but unbowed Donald Trump, the playbook looks fairly predictable.

Just as we saw after Joe Biden’s laughably poor performance in the first presidential debate a few weeks ago, two of three key elements of the so-called Trump trade – bitcoin up, the US dollar up and bond yields higher – performed as expected in the hours following the assassination attempt on the former US leader.

Donald Trump now looks near-certain to win in November. But can he engineer a sweep of Congress too? David Rowe
Bitcoin broke through $US60,000 ($88,650) for the first time in almost two weeks, seemingly helped by Trump’s pro-crypto stance, while the US dollar edged higher. The theory here is that the dollar will strengthen if loose fiscal policy under a Trump administration keeps bond yields elevated.

Trade in US Treasuries in Asia closed on Monday due to a holiday in Japan, so we’ll need to wait a little longer to see if Treasuries again enter the “bear steepener” trade we saw after the debate, whereby long-term bond yields rise on anticipation that Trump’s policies will fan inflation pressures. Look for that on Wall Street on Monday night.

There are other industry-specific elements to the Trump trade that may find extra supporters after Sunday’s assassination attempt, which appear to have further increased the odds of a Trump victory in the November election.


Energy stocks are expected to win thanks to Trump’s dislike of renewables and broader approach to regulation. Private prison operators are also seen as a winner due to the Trump administration’s expected focus on law and order. Credit card companies and health insurers might also win if Trump cuts subsidies for lower-income families and public health funding, as expected.

But while the odds of Trump returning to the White House have improved, it remains to be seen whether the shocking outbreak of political violence will spook some investors, and send them running for traditional safe havens such as gold, Swiss francs and US Treasuries.

Indeed, US Treasuries provide a neat example of why any Trump trade price action may be more muted this time; a safe-haven rush to US bonds could well cancel out any yield curve steepening (bond prices and yields move in opposite directions).
It’s a tricky set-up. Perhaps the smartest thing for investors to do is to ignore any knee-jerk market reactions and look at the bigger picture in the wake of the attempted assassination.

As Vantage Point’s Nick Ferres says, political uncertainty around the US election is now lower than it was – Trump, who is generally seen as more pro-market than Biden, is now almost certain to win in November, and will probably win easily.
The question that follows is obvious. What does this mean for what Macquarie strategist Viktor Shvets defines as the two biggest issues facing the US: extreme inequality and inflation?

On the face of it, Trump’s policy platform would do little to address either issue.

Shvets says the Republican Party’s “only visible economic policies involve cutting taxes, removing subsidies from the poor, deregulating industries, stemming immigration and introducing wide-ranging tariffs. These will exacerbate problems – further widening inequalities and raising inflation.”

Ferres shares this concern. “The key issue looking forward is whether fiscal policy remains irreversibly loose and the implications that might have for (renewed) inflation and the future path of interest rates,” he says.

In a market where equity risk premium (the difference between 10-year bond yields and earnings yields) remains non-existent, and implied volatility is extremely low, Ferres says investors remain all-in on the idea that disinflation will resume and interest rates will come down – and they are vulnerable if this doesn’t play out.

Shvets’ long-held hope has been that a divided outcome at the US polls in November – that is, neither party winning both the White House and Congress – was the most probable and best outcome for investors, as it would limit either side’s ability to enact their full policy platform.

But he now says investors must get ready to balance short-term gains and long-term pain from a Republican sweep.

While the long-term implications for inflation, rates and inequality from cutting taxes, reducing subsidies, constraining immigration, deregulating industries, and raising tariffs are worrying, Shvets says investors can’t ignore the fact that “these might boost short-term corporate return on equity and selectively benefit a few industries (e.g. healthcare, energy).”

But his biggest unknown is whether “a Republican administration would systemically attack US institutional pillars”, given most Republican think tanks are discussing the “deconstruction of the administrative state” through moves such as abolishing and/or eliminating entire federal departments and agencies (such as the Environmental Protection Agency) or bringing others (including the FBI or the Federal Reserve) more under the control of the president.

At the very least, Shvets argues, this indicates a desire to attack key institutional pillars, which he says would raise risk levels for investors over the long term.