(Bloomberg) — Investors have been amassing wagers on Donald Trump’s return to the White House for weeks, trimming holdings of long-term US bonds and buying Bitcoin, among other things. Now, they’re considering whether Joe Biden’s exit from the race boosts the odds of a Democrat victory — and how much they must recalibrate their bets.
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One thing seems certain after the president dropped his reelection bid: Though the announcement was widely expected as the 81-year-old faced pressure from allies, it injects a wild card into the campaign that will likely translate into volatility for markets.
“This means more uncertainty,” said Gene Munster, co-founder and managing partner at Deepwater Asset Management. “There was a lot of confidence about Trump winning, and markets won’t like this new uncertainty, along with the news cycle about who is in, who is out, and all those unknowns.”
Biden’s announcement Sunday that he was ending his effort to seek another term and endorsing Vice President Kamala Harris is the latest of several political shocks absorbed by markets in recent weeks.
As investors digest the latest news, the Trump trade — favoring sectors and strategies seen as benefiting from the Republican’s advocacy of looser fiscal policy, higher trade tariffs and weaker regulations — is likely to face headwinds.
This, while investors are also bracing for potential market convulsions from the wave of second-quarter earnings results that are just starting to come through, and as they continue to plot scenarios for when the Federal Reserve will begin cutting interest rates.
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The dollar edged lower in Asia trading Monday, with the euro, Swiss franc and Mexican peso seeing marginal gains. Treasury yields dipped across the curve, while US equity futures were modestly higher.
“The main thought process in the bond market should be what this new uncertainty brings. People had gotten to the point where they were piling into the Trump trade – with it beginning to become a real narrative. I had thought that was way too soon,” said Glen Capelo, managing director at Mischler Financial. “The curve steepening trade will probably have to unwind a little bit.”
Markets may be jumpy as traders wait to see if Harris secures her party’s nomination and gathers enough momentum to challenge Trump’s lead in the polls. As traders await new polls reflecting Biden’s absence, betting market PredictIt has Harris as the favorite to become the Democratic nominee, but Trump still favored to win the presidency.
The basics of the Trump trade have taken the form of support for rising US bond yields, gains in bank, health and energy stocks as well as Bitcoin and a stronger dollar — even as Trump himself has signaled he prefers the US currency to weaken.
Some of the Trump trade in the bond market had already started to subside last week, as investors turned their attention back toward economic data and the Fed. Meanwhile, recent moves in stocks have been marked by a shift out of Big Tech shares and into smaller companies in sectors that had been laggards.
“Investors should expect a spike in volatility,” Dave Mazza, chief executive officer of Roundhill Financial, said before Sunday’s announcement. “If Vice President Harris can mobilize quickly to give Trump a material run, then we should expect volatility to linger. However, if Trump continues to pull ahead in the polls and investors view his win as inevitable, then the Trump trade will take over and volatility will decline.”
What Bloomberg’s strategists say…
“Unless there is a material change to Trump’s chances, traders will likely position for dollar weakness as there could be more verbal attacks against weak foreign currencies leading into November. Meanwhile, Treasuries will have a more nuanced outlook. Curve steepening is likely to extend amid concerns about larger deficits, but within a framework of falling yields as the Federal Reserve moves toward its first interest rate cut this year.”
— Mark Cranfield, Markets Live strategist. See more on MLIV.
There is little historical data to use for a read on how markets will react. The most recent example of a sitting president not seeking a second term was Lyndon Johnson in 1968.
“We just don’t have a lot of precedence for a situation with a candidate who did not go through the normal primary process,” said Julie Biel, portfolio manager and chief market strategist at Kayne Anderson Rudnick. “So we are once again continuing our very long-term love affair with unprecedented times.”
Some investors in Asia, before Biden stepped out of the race, saw the Trump trade actually benefiting from his departure, which could lead to pressure on everything from broad China stock benchmarks to the shares of Korean battery makers in the region.
Asian shares fell Monday, with Taiwanese and Korean shares underperforming, though analysts said the moves were largely down to negative sentiment toward the technology sector.
One complicating factor for bets on Asian currencies has been Trump’s criticism of the current weakness in the yen and the yuan, which could cap pressure even if his victory is expected to broadly strengthen the dollar. The yen was modestly stronger in afternoon trading in Tokyo.
“President Biden dropping out of the elections adds new uncertainties to the market,” said Citigroup Inc.’s Johanna Chua. “The market will reassess not only the distribution of the presidential race probabilities but also the implications on the congressional race outcomes.”
–With assistance from Carter Johnson, Anya Andrianova, Bre Bradham, Tasos Vossos, Elizabeth Stanton, Ruth Carson, Nazmul Ahasan, George Lei, Isabelle Lee, Elena Popina, Michael Mackenzie, Ryan Vlastelica and Matthew Burgess.
(Updates market moves and adds comment)
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