Trump ‘Take Two’

WHERE WE STAND – Donald Trump is on track to win the 2024 presidential election, and become just the second man – after Grover Cleveland – to serve two non-consecutive terms as President.

While votes continue to be counted, Trump has been called as the winner of key battlegrounds Georgia and North Carolina, while also being ahead in the ‘Rust Belt’ states, leaving Harris’ potential path to victory as almost impossibly narrow.

Financial markets became convinced of such a victory relatively early on election night, after North Carolina was called in Trump’s favour, and after a considerably better than expected showing for Trump in the hotly contested battleground state of Georgia.

While significant, the market reaction to Trump’s electoral victory has been largely as expected, though most assets trade off overnight extremes, as attention turns to the makeup of Congress.

In the FX space, the greenback has rallied sharply across the board, gaining substantial ground against both DM and EM peers. The dollar index (DXY) gained as much as 1.5%, the biggest jump since March 2020, vaulting north of the 105 figure, to its best levels since July. While all G10s trade well over 1% softer, it is trade-sensitive currencies that have underperformed to the most significant degree.

Nowhere is this more obvious than the MXN, which has slumped almost 3% to its weakest in a couple of years, as USD/MXN rips towards the 21 handle, amid substantial market concern that a second Trump Administration will lead to renewed trade barriers with Mexico. The CNH has also slumped, by around 1%, though rumours are abound that domestic banks have been selling USD offshore in order to prop up the CNH, at least to some degree.

The election outcome strengthens the existing USD bull case, with US economic growth set to continue outperforming that of peers for the foreseeable, and participants not especially perturbed by the Fed’s rapid pace of policy normalisation, which is broadly synchronised with that being taken by G10 peers.

The buck’s gains have come amid a sizeable sell-off across the Treasury curve, led by the long-end. This selling pressure has seen both 10- and 30-year yields rise by almost 20bp, with the former nudging towards 4.50%, and the latter on its way to a test of 4.65%, though around half of this sell-off has since been retraced.

As noted prior to the election, there are two primary catalysts for this selling pressure. Firstly, as growth expectations re-rate to the upside amid expectations that Trump’s proposed tax cuts, and significantly greater government spending, will act as a short-term fillip for the economy. And, secondly, amid higher inflation expectations given the risk of a resurgence in price pressures upon the imposition of the tariffs that Trump mooted throughout the election campaign.

Meanwhile, in the equity space, futures have advanced, with both the S&P and Nasdaq gaining over 1%. This move owes partly to the aforementioned tax cuts, and boost to earnings that will follow, but also due to the certainty that the election appears to have produced, with a drawn-out process to tabulate ballots, akin to that seen in 2020, seemingly having been avoided.

Of course, also as mentioned yesterday, the longer-run equity bull case remains intact. Economic growth continues to be strong, earnings growth throughout Q3 reporting season has been solid, and the forceful ‘Fed put’ continues to underpin sentiment. Now, with electoral uncertainty having been removed, the course is clear for further gains to take the market into year-end.

LOOK AHEAD – Naturally, participants will continue to digest the election results today, with particular focus on the makeup of Congress. While the GOP appear to have over 50 seats required to flip control of the Senate, only time will tell as to whether they are also able to flip control of the House, though full results here will likely take some time to become clear.

Were a so-called ‘red wave’ scenario to come to fruition – where the GOP control the Presidency, House, and Senate – some further downside would likely be seen in Treasuries, given the lack of constraints that would be applied to any of Trump’s fiscal proposals. In turn, the dollar could well find further demand by virtue of a ‘hunt for yield’, and continued bets on the ‘US exceptionalism’ theme.

In some ways, a ‘divided government’ scenario could be a goldilocks one for markets – with a perceived pro-business and pro-deregulation President providing a boost to sentiment, while deadlocked Congress keeps a lid on any fiscal largesse.

Away from the election, the docket is relatively quiet, while most releases will likely have little major market impact. That can certainly be said of this morning’s eurozone prints – the final services PMI figure, and September’s PPI data. Today’s 30-year US supply could well be considerably more interesting, with demand for the tap likely to be plentiful, given the 20-odd bp ramp higher in yields seen overnight.

Lastly, we hear from ECB President Lagarde today. What more could one want after an all-night long election shift than to listen to her! Still, I suppose there’s a degree of symmetry at least – we started this note talking about a perma-tanned individual, and end it talking about a different one.