Biden's exit from the race introduces market uncertainty, prompting investors to adjust their strategies
Investors have been adjusting their portfolios in anticipation of Donald Trump's potential return to the White House, moving away from long-term US bonds and investing in Bitcoin, as reported by BNN Bloomberg.
Now, with Joe Biden exiting the race, they are evaluating whether this increases the odds of a Democrat victory and how to recalibrate their bets.
Biden's decision to end his re-election bid and endorse Vice President Kamala Harris introduces new uncertainty into the campaign, likely increasing market volatility.
Gene Munster, co-founder and managing partner at Deepwater Asset Management, remarked, “This means more uncertainty. 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.”
Following Biden's announcement, demand for safe-haven assets like the Swiss franc, US Treasuries, the yen, and gold increased. Bitcoin also edged up to its highest level in over a month.
Investors are reconsidering the “Trump trade,” which favours sectors benefiting from Trump's policies, such as looser fiscal policies, higher trade tariffs, and weaker regulations.
They are also preparing for potential market disruptions from second-quarter earnings results and speculating on when the US Federal Reserve might cut interest rates.
Glen Capelo, managing director at Mischler Financial, noted, “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. The curve steepening trade will probably have to unwind a little bit.”
Many trades are based on the belief that a second Trump presidency would be fiscally expansionist, potentially reigniting inflation. This belief has increased the demand for the US dollar recently, despite Trump's preference for a weaker currency to improve American competitiveness.
On Monday, the dollar edged lower, with a Bloomberg gauge of the currency falling 0.1 percent. This weakness did not significantly boost the Mexican peso, which fluctuated between gains and losses.
Shorting the peso has been a common strategy under the assumption that Trump would impose economic tariffs detrimental to US trading partners like Mexico.
Other popular strategies include betting on rising US bond yields, gains in bank, health, and energy stocks, as well as Bitcoin. Futures contracts on the S&P 500 Index rose in London trading.
Private prison stocks, such as GEO Group Inc. and CoreCivic Inc., are likely to be in focus, along with big banks, as these sectors are expected to perform better under Republican policies.
Stefan Koopman, a senior macro strategist at Rabobank, mentioned that Biden’s decision introduces a wild card into the campaign, potentially leading to market volatility.
He noted, “Swings would pick up if Harris narrows the polling gap. If Trump continues to lead in the polls and investors remain viewing his win as inevitable, the ‘Trump trade,’ which implies deregulation, tax cuts, and increased fiscal spending, will dominate.”
Some of the Trump trade in the bond market had already started to subside last week as investors focused on economic data and the Fed. Recently, stocks have seen a shift out of Big Tech shares and into smaller companies in previously lagging sectors.
Markets are now speculating on what a potential “Harris trade” would look like. Bloomberg Intelligence analysts suggest that a win for Harris could mean policy continuity in many sectors but with increased focus on tax relief for lower-to-middle-income consumers and additional regulatory actions.
Betting market PredictIt currently favours Harris to become the Democratic nominee, while Trump remains the favourite to win the presidency.
Kathleen Brooks, research director at XTB, commented, “It is too early to tell if the ‘Harris trade’ will cause a bounce back in US equities after last week’s declines. Harris was considered tough on oil and anti-shale and fracking. Thus, her surge in popularity could impact the US energy sector.”
Traders will closely watch whether Harris secures her party’s nomination and gains enough momentum to challenge Trump in the polls.
Eddie van der Walt, a Markets Live strategist, stated, “A relatively muted market reaction looks warranted. Trump was likely to win yesterday, and Trump is likely to win today. It’s hard to see why traders would massively reposition portfolios unless polls start showing a likely Harris victory or a close race.”
Historical precedents for such developments are limited, with the most recent example being Lyndon Johnson in 1968.
Julie Biel, portfolio manager and chief market strategist at Kayne Anderson Rudnick, said, “We just don’t have a lot of precedent for a situation with a candidate who did not go through the normal primary process. So we are once again continuing our very long-term love affair with unprecedented times.”
