Donald Trump’s style may begin to make financial markets volatile again, and that would benefit a part of global fast money traders.
With Trump and Biden in close competition ahead of the first presidential debate on Thursday, investors have already tried to discuss how the return of the Republican party to the White House could affect allfrom the electric vehicle industry to the direction of long-term interest rates.
Markets, as a rule, don’t like that kind of uncertainty. But for a subset of hedge funds that jump in and out whenever big swings and anomalies cause prices to briefly look out of whack, that’s almost beside the point.
What they see in Trump is much simpler: Recollections of the opportunities that arose during his four years in officewhen his comments and social media posts sometimes surprised investors, triggering dramatic short-term moves in financial markets.
“Politics aside, if you ask a trader if he wants Biden or Trump, the trader is going to surf the big wave, so it’s Trump,” said Calvin Yeoh, portfolio manager at hedge fund Blue Edge Advisors. in Singapore.
“Trump is more volatile and unpredictable,” he added.
During Biden’s term, of course, there has been no shortage of volatility. Rising inflation, Russia’s war in Ukraine and the Federal Reserve’s rate hikes did much to batter markets. As a result, some measures expected in the market have been broader than they were during much of Trump’s termand it is possible that conflicts with Republicans over economic issues, such as the debt ceiling, could intensify if Biden wins a second term.
Biden has maintained a traditional style honed by a decades-long career in Washington. While Trump, by contrast, has communicated directly with the public through X-rated posts, leaving marketers scrambling to determine the implications.
Why Donald Trump could favor the markets?
With the election more than four months away, financial markets have so far been overshadowed by the strength of the economy and speculation about when the Federal Reserve will begin cutting interest rates. Even so There has been some preparation for increased volatility around the November elections, especially if the outcome is in doubt.
“The consensus view is that Trump will create volatility,” said Vineer Bhansali, founder of asset management firm LongTail Alpha, based in Newport Beach, California. “The market is already pricing in that to happen. So The surprise will be if Trump wins and there is actually less volatility”.
Trump’s initial victory in 2016 shook the bond market, with 10-year Treasury yields rising nearly a full percentage point in December on anticipation that his tax cut plans would stimulate the economy and prompt the Federal Reserve to accelerate their rate increases.
While in office, his comments and social media posts sometimes sent ripples through the markets. In 2017, for example, Puerto Rico’s bonds fell when it suggested that the island’s debt would have to be erased entirely after it was devastated by a hurricane, only to recover once traders realized the problem would remain in the hands of the court that was already overseeing his bankruptcy.
Amazon.com Inc. shares dragged the following year when Trump opposed the retailer’s shipping deals with the United States Postal Service after a report that he was ‘obsessed’ with going after the company. Then in August 2019, US stocks were repeatedly battered by its threats to sharply escalate a trade war with China, helping to initiate upward or downward moves of more than 1 percent in the S&P 500 during mid-trading sessions. of that month. This dispute also moved the currency markets, a corner where hedge funds are active.
Even some investors, with a longer-term, fundamentals-based approach, hope that a political upheaval by Trump could create ways for them to profit.
“Trump’s noise sometimes creates opportunities”said Carol Lye, a portfolio manager at Brandywine Global Investment Management in Singapore, citing the slide in the Mexican peso that occurred in late 2016, when he pledged to build a border wall, before the currency recovered the following year.
What is the forecast for the markets?
It is likely that The US election campaign will become more attractive for Wall Street as the day approaches of the elections and political positions become a more prominent part of the race.
Trump and Republicans have already made clear they will push to renew the sweeping tax cuts put in place in 2017 that are set to expire next year, though Biden and Democrats have also indicated they want to extend at least some of them.
Trump is also expected to seek to more aggressively deport those working illegally in the U.S. and has called for 60 percent tariffs on imports from China and 10 percent on duties from the rest of the world.
Besides, Both could exert upward pressure on inflation, which could reset market expectations of interest rate cuts.
Some informal Trump advisers have floated ideas about possible changes to the Federal Reserve that would also give him more power over the central bank. Although neither he nor the campaign has endorsed this idea, such a step would almost certainly roil the bond market by raising concerns that the bank would face politically motivated pressure to cut interest rates.
“You have to address the elephant in the room, which is that no matter what happens in the scenario where Trump wins, everything he says will be amplified in North America and around the world,” said George Boubouras, head of research at the hedge fund K2 Asset Management Ltd.
“We in the markets love volatility, but we try not to get too bogged down in the amplified emotion that will come from a Trump presidency,” he concluded.
