Opinion | Why do investors refuse to take threat of second Trump term seriously?
.July 18, 2024
Former US president Donald Trump looked eminently electable long before he became the target of an assassination attempt on July 13. His stock now appears to be even stronger as he prepares for the final stretch of a presidential race that is deepening bitter divisions in US society and is bound to deliver more surprises before election day on November 5.
In prediction markets, where punters bet on the outcomes of particular events, Trump appears to be the favourite to win the election. According to the PredictIt spread betting site, the odds of a Trump victory have risen to 65 per cent, up from 60 per cent before the assassination attempt. US President Joe Biden’s chances, meanwhile, currently stand at 20 per cent, which is down from 48 per cent before the first presidential debate on June 27.
Financial markets, which largely ignored the election in the first half of this year, are starting to be swayed by the prospect of a second Trump term. Since the debate, a so-called Trump trade – bets on assets that are sensitive to expectations of deregulation, tax cuts, higher trade tariffs and a crackdown on immigration – has begun to take hold.
The clearest sign of this is in US bond markets. The slope of the yield curve has started to steepen as long-term yields rise relative to short-term ones. With the US Federal Reserve widely expected to begin cutting interest rates in September, yields on short-dated bonds continue to fall. However, a second Trump term would ignite inflation because of a combination of even looser fiscal policy, more punitive tariffs and draconian tactics to curb migration. This is putting upward pressure on long-term yields.
Other signs investors are beginning to position for Trump’s return to the White House are the rally in the US dollar – which would benefit from expectations of a resumption of monetary tightening – and a surge in energy and private prison stocks that have been given a fillip from Trump’s pro-drilling stance and anti-immigration platform.
Cryptocurrencies have also gained, partly because of Trump’s apparent support for digital tokens but mainly because of the prospect of political chaos in the US.
People hold signs that read “Mass Deportation Now!” on the third day of the Republican National Convention at the Fiserv Forum in Milwaukee, Wisconsin, on July 17. Photo: AFP
Yet while investors appear increasingly sure of a Trump victory, they have yet to come to terms with the far-reaching economic and geopolitical consequences of a second Trump presidency. The Trump trade, and a tentative one at that, barely scratches the surface of the uncomfortable trade-offs and acute threats markets will have to grapple with if Trump wins the election. Some of them are foreseeable, while others will be unpredictable.
First, if the Fed itself anticipates a second Trump term, why would it cut rates this year given the renewed inflationary pressures Trump 2.0 is expected to unleash? As JPMorgan notes, “there is a distinct lack of consensus about the outlook [for monetary policy] in 2025”. This is another way of saying that the risk of a policy mistake by the world’s most influential central bank is rising.
The implications for the global economy are profound. There are already fears the Fed has kept rates too high for too long, with the US labour market slowing more sharply than expected in recent months.
Moreover, if the Fed gets cold feet about easing policy, property markets across the world would be hit hard, as would emerging markets. The nightmare scenario for the US central bank is to cut rates this year only to have to raise them again next year. Investors are underestimating the risk of a Fed policy blunder.
Second, Asian markets could be in for much more pain if Trump wins. The election comes at a time when China’s economy is struggling to stabilise and is in a more precarious position than when Trump’s trade war erupted in mid-2018. The yuan is under more pressure partly from the gap between US and Chinese borrowing costs.
JPMorgan estimates that every 1 per cent tariff rate during the 2018-19 phase of the trade conflict was associated with a 0.7 per cent rise in the US dollar versus the yuan. Trump’s plan to impose a 60 per cent levy on Chinese goods would imply an exchange rate level close to 9 per dollar, 25 per cent weaker than the current level.
While such a dramatic depreciation is unlikely to occur for a variety of reasons, JPMorgan notes there is “little trace of geopolitical risk premium” in China’s currency market. This increases the risk of a sharp adjustment that would spill over into other Asian markets, potentially triggering a full-blown regional sell-off.
Third, as the assassination attempt against Trump made clear, the scope for more shocks and surprises in an already volatile and conspiracy-laden election is considerable. Deep and pervasive uncertainty permeates US politics. Will Biden stay in the race? Will there be more political violence? Can the US even hold a free and fair presidential election in such a dangerously polarised and tense political environment?
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Chinese retailers rush out souvenir T-shirts hours after Trump rally shooting
Chinese retailers rush out souvenir T-shirts hours after Trump rally shooting
Some investors believe this is reason enough not to trade the election, or at least wait until September or October, yet there is a fine line between waiting for the right moment and being complacent. A contested result, a full-fledged constitutional crisis, mounting concerns about the US fiscal deficit and credit rating downgrades are distinctly possible.
That the benchmark S&P 500 equity index hit a fresh all-time high on Tuesday shows markets are still not taking the economic and geopolitical consequences of a second Trump term seriously. If not now, then when?
