US President Joe Biden’s exit from the presidential race on Sunday could prompt investors to unwind trades on bets that a Republican victory would increase fiscal and inflationary pressures in the US, while some analysts argue that markets could benefit from a greater possibility of a divided government under the next administration.
The so-called “Trump trade,” which posits that the former president’s tax policies in a potential election victory would boost corporate profits while damaging the country’s long-term budget health, has gained traction since Biden’s disastrous televised debate last month.
This was particularly visible in U.S. government bonds, with long-term Treasury yields – which move inversely to prices – briefly rising as expectations grew that Republican presidential candidate Donald Trump would retake the House following the debate and latest assassination attempt over the weekend.
While yields fell rapidly on signs of economic weakness, the move reflected investors’ belief that a Trump presidency could lead to inflationary policies and a more expansionary fiscal stance.
But Biden’s decision to step aside and endorse Vice President Kamala Harris to replace him as the Democratic nominee casts doubt on a Trump victory and will likely prompt investors to scale back those bets.
Trump’s team has said his pro-growth policies would lower interest rates and reduce deficits. Many market participants believe deficits would continue to worsen under a second Biden administration.
“It takes the wind out of the sails of the trades that are betting on Trump winning,” said Cameron Dawson, CIO of NewEdge Wealth in New York, though he said markets will wait for more clarity on who the nominee will be.
“This is when we can expect a reversal of the ‘Trump Trade’ and other types of moves,” Dawson said.
A Reuters/Ipsos poll released Tuesday found Trump holding a marginal lead among registered voters — 43% to 41% — over Biden.
In accepting the Republican nomination on Thursday, Trump recommitted to lowering corporate taxes and interest rates. Analysts also expect a Trump presidency to make trade relations more difficult, which could lead to inflationary tariffs.
The reduction in tax revenues could increase the U.S. federal government’s budget deficit, which has risen steadily for much of the past decade, including during the previous Trump presidency from 2017 to 2020, although a spike in 2020 was driven primarily by the government’s relief from the Covid-19 pandemic.
Many investors believe the deficit will continue to worsen even under a second Democratic administration, but a more balanced election outcome could reduce the risk of excessive fiscal stimulus expected if Republicans dominate Washington.
Source: Terra
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