On June 27th at 21:00 Eastern Time, 81 year old US President Biden and 78 year old former President Trump held their first presidential debate in Atlanta for the 2024 presidential election. A public opinion survey conducted by the organizers after the debate showed that Trump won the debate with a support rate of 67% to 33%.
According to real-time betting data from prediction firm Predictlt, Trump's chances of winning the November election have risen from 53% before the debate to 60%, while Biden's chances are declining. According to data from another forecasting firm, Polymarket, Trump's winning rate was 65%, reaching a historic high of 68%, far surpassing Biden. Affected by this, the US stock market is expected to benefit from the rise of credit card companies and healthcare insurance sectors elected by Trump, while renewable energy stocks and others are expected to decline.
The market has always disliked uncertainty, and elections often bring uncertainty. But for some hedge funds that prefer to make profits through volatile trading, Trump's temporary lead is something they enjoy, because Trump's improvisational style and unpredictable policy stance often give rise to and drive up market volatility. At the same time, as the election continues to advance and enters a more heated debate period, the market has also begun to make predictions about the impact of the election on the market and begin to price the election results.
Favorite trading volatility institutions
Calvin Yeoh, portfolio manager of Singapore hedge fund Blue Edge Advisors, stated that the institution prefers Trump's unpredictability as market fluctuations provide opportunities for trading volatility. Although during Biden's administration, the market also experienced major shocks such as soaring inflation, the Russia-Ukraine conflict, and the Federal Reserve's interest rate hike, Biden preferred traditional policy communication, while Trump preferred to communicate directly with the public through social media, bringing more immediate responses to the market.
Goldman Sachs analyst Oscar Ostlund said that the Goldman Sachs options market usually starts pricing around three months before the election. "Although it has not yet fully entered this stage, market volatility is expected to rise soon, and the market should closely monitor the potential impact of the election on the market."
Vineer Bhansali, founder of asset management company LongTail Alpha, also stated that the market is prepared for the potential turbulence that Trump may bring, and if Trump wins and market volatility decreases, it will be unexpected.
Even some long-term investors anticipate that Trump's policy changes will create new investment opportunities. Carol Lye, portfolio manager at investment management company Brandywine Global Investment Management, gave an example that Trump had promised to build a border wall, causing the Mexican peso to plummet but then quickly rebound.
In addition, for example, during his predecessor, Trump's comments and social media posts often triggered short-term market volatility, providing abundant trading opportunities for such traders. Trump's unexpected victory in 2016 had a severe impact on the bond market: the market expected Trump's tax reduction plan to inject vitality into the economy, prompting the Federal Reserve to accelerate the pace of interest rate hikes. This expectation pushed the yield of 10-year US treasury bond bonds sharply up by nearly one percentage point in December of that year. Subsequently, in 2017, Trump proposed that Puerto Rico should waive its debt after the hurricane disaster, which led to a sharp drop in Puerto Rican bond prices. When the market realized that the debt issue would be handled by the court, the price of Puerto Rican bonds quickly rebounded. In August 2019, Trump's statement on trade issues once again caused severe fluctuations in the US stock market, with the S&P 500 index experiencing multiple daily gains and losses of over 1% during the trading days of that month.
This time, Trump's policy stance and campaign promises have once again become the focus of institutional attention. Trump and the Republican Party have clearly stated that they will push for an extension of the tax cuts implemented in 2017, and it is expected that Biden and the Democratic Party will express their desire to extend at least some of the tax cuts. Trump is expected to take more proactive measures to expel illegal immigrants and take a tough stance on trade policy. These measures may also bring upward pressure to US inflation again, affecting market expectations for the Federal Reserve's interest rate cut. In addition, some of Trump's informal advisors have proposed ideas for reforming the Federal Reserve, although these ideas have not received clear support from Trump and the campaign team. However, the market is concerned that the reform may put political pressure on the Federal Reserve, affecting its normal rate cut process and affecting the US bond market.
The market is starting to price the election
On the day of the first round of debate, the three major US stock indexes collectively closed higher, and the S&P 500 index has been declining by no more than 2% for nearly 400 trading days. However, Ostrod believes that this situation may soon change, and election risks have begun to spread to financial markets. After conducting a survey of 800 institutional investors worldwide, Goldman Sachs analyzed and concluded that whether the Republican or Democratic Party wins, the US government will increase the spending freedom of the executive branch, which is undoubtedly a negative factor for the bond market; If Trump wins, whether it is a split House of Representatives or a unified government, the market believes that it will be beneficial for the US stock market, as this may mean that the Federal Reserve will adopt a more dovish policy; Investors generally believe that the victory of the Democratic Party will be detrimental to the US dollar and may lead to its depreciation.
Goldman Sachs star US stock strategist Dominic Wilson also analyzed in detail in the election preview report the potential impact of four major election scenarios for the US President and Congress on the market. These four scenarios are "Republican sweep", "Democratic sweep", "Trump administration split", and "Biden administration split". In the scenario of a Republican sweep, the Republican government may continue its soon to expire tax cuts and may further implement corporate tax cuts. The US stock market will rise moderately, US bond yields may rise, and the trade weighted US dollar will appreciate; In the context of the Democratic sweep, the Democratic government is expected to implement greater fiscal stimulus measures, pushing up US bond yields, causing a moderate decline in US stocks and a moderate depreciation of the US dollar; In the context of the Trump administration split, potential tariffs combined with fiscal tightening may have a negative impact on both US stocks and bonds. US stocks will moderately decline, US bond yields will slightly increase, and the US dollar will appreciate significantly; In the context of the Biden administration's split, the reduction of new tariffs is expected to be smaller than expected, bringing upward momentum to the US stock market and potentially pushing up US bond yields, while the US dollar may weaken. Regardless, Wilson stated that investors should remain vigilant about the outlook for US stocks in the face of fiscal expansion and increased tariffs.
Not only US stocks, but also US bond yields tend to rise in almost all four scenarios, indicating that there is a risk of continued selling of US bonds. According to Andrew Lilley, chief interest rate strategist at analysis firm Barrenjoy, Trump's approval rating is leading after the initial debate, and there is still controversy over whether it is good or bad for the US stock market. However, for the US bond market, the impact is more certain, as US bond yields will rise. In fact, after the initial debate, US bond yields have been consistently rising. Barclays Bank also warned that considering Trump is an "inflation bomb", investors should repurchase Inflation Protected Bonds (TIPS). If Trump is elected, the bank stated that the 5-year TIPS will outperform the regular 5-year US Treasury, and the interest rate difference between the two will widen. Previously, the term "inflation bomb" came from a joint letter from 16 Nobel laureates in economics.
Karl Schamotta, the chief market strategist of intelligent payment company Corpay, has highlighted the risks from an exchange rate perspective. He believes that the increase in Trump's win rate has led to the depreciation of currencies sensitive to trade with the United States, including the euro, Canadian dollar, and Mexican peso.