Markets telling us how they feel about a Trump presidency

At this early stage, market participants will await new polls conducted in the wake of the attempted assassination, but the betting markets do offer some ability to price risk, and they currently price Trump’s chance of reclaiming the White House at around 66%. With Biden digging his heals in to hold his position as the Democratic Party nominee, market players can feel increased conviction that it will indeed be a Trump vs Biden match-up in November, and again that gives us greater ability to attempt to price the future – and that future is now heavily skewed towards the Republicans taking both the White House and Senate, but they also have a real shot at taking the House, something that was seen as a low probability a few weeks ago.

Clients have asked how a Trump presidency could affect financial markets – well, the extent of any potential impact does rely on whether the Republicans take the House, as a so-called ‘Red Wave’ will impact their ability to pass deep fiscal programs through Congress in full. However, as we saw after the 1st debate and in market moves today, we are seeing a glimpse of how market players want to express a Trump Presidency – and clearly, that outcome is positive for US equity, notably with promises of deregulating industry, which would be a strong positive kicker if it did eventuate.

The threat of sweeping tariffs is a USD positive, and notably, on the day we see the USD finding buyers vs the MXN, and CNY, although it’s hard to put on these Trump trades in the spot market with conviction as there are so many other factors that can influence in the next few weeks, let alone months. It is perhaps also fitting to see the Hang Seng and China H-Shares lower, and while confidence towards China/HK equity is already quite fragile, perhaps these moves represent an element of front running the increased odds of 60% tariffs placed on Chinese exports. Long NAS100 / short HK50 will have a place in the Trump trade playbook.

We also see US 10-year Treasury futures +4bp, and again that speaks to traders seeing a greater prospect of the 2017 Tax Cuts and Job Act being rolled over in 2025 in full. A ‘Red Wave’ would smoother passage here resulting in the US deficit blowing out by potentially over $1.5t. With the Republicans wanting to increase defence spending, as well as rolling over tax cuts, and there is no chance of touching Medicare or Medicaid, one wonders where exactly the offsets will come from. It seems all roads lead to higher long-end US bond yields (and steeper yield curves), which suggests under Trump the Fed will have to adopt a third mandate – that is, setting policy to keep market interest rates low, so as to reduce the US Treasury Department's interest burden.