Biden's exit from race puts Trump trade in doubt as election gets re-set

By Liz Capo McCormick and Natalia Kniazhevich

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. 
 

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. 

First, Biden stumbled through a disastrous debate performance against Trump, prompting investors to rapidly downgrade his chances of winning the election. Then, there was the failed assassination attempt against Trump, which only deepened the sense among many in the market that he’d win in November.

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. 

Investors react

Early trading in Asia on Monday was relatively subdued, suggesting investors are taking a wait-and-see approach. The dollar was quoted slightly lower against major peers, while Bitcoin hovered around $68,000 and equity futures were hardly changed. 

In the Treasury market, US longer-maturity bond futures rose more than their shorter-dated equivalents, pointing to a modest reversal of the so-called curve steepener trade associated with a victory for Trump.

“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.

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.

A fresh Democratic ticket means “Trump trades would wobble as markets recalibrate the odds,” Grace Fan, managing director of global policy research at GlobalData. TS Lombard, wrote in a July 17 note. Those wagers are “are unlikely to budge much,” however, if Harris is the eventual candidate, she said. 

Some investors in Asia, before Biden stepped out of the race, saw the Trump trade benefiting from his departure, leading to pressure on everything from broad China stock benchmarks to the shares of Korean battery makers in the region. One complicating factor for currencies was 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.

Japanese and Indian shares were seen as faring best in the region.