Markets reassess ‘Trump trades’ after Joe Biden withdraws from race

There was a muted reaction in markets on Monday following Joe Biden’s decision to drop out of the US presidential race, as investors tried to work out the implications for “Trump trade” positions they had built in the past few weeks.

In early trading, some recent market moves associated with a Donald Trump election victory — such as a steeper US yield curve, a weaker Mexican peso and a rally in regional bank stocks — went into reverse, as investors bet the former president’s odds of victory had receded.

But many of Monday’s initial moves proved shortlived.

Prediction markets showed Trump’s probability of victory had declined slightly since Biden quit the race and officially endorsed vice-president Kamala Harris, although they ticked higher again later on Monday.

The 10-year Treasury yield climbed 0.03 percentage points to 4.27 per cent, having earlier fallen to 4.21 per cent.

Investors have in recent weeks been adding to a bet in Treasury yields that could pay out if Trump’s tariff and tax-cutting plans ultimately lead to higher inflation. That trade — a so-called yield curve steepener — could also pay off if lower inflation in the short term prompts the Federal Reserve to cut interest rates in the coming months.

The Treasury curve flattened on Monday morning in a reversal of that trade. But by midday, the move had unwound, leaving the yield curve roughly where it was before the Harris announcement.

Reaction in stock markets was similarly quiet, though there were some small reversals in trades that were associated with a Republican victory.

The KBW regional banks index, for example, fell as much as 1.4 per cent in early trading. Small bank stocks are seen as potential beneficiaries of a second Trump term due to hopes for reduced regulation, pro-growth policies and more receptivity to mergers and acquisitions. New York Community Bancorp, the lender backed by former Trump Treasury secretary Steven Mnuchin, was the biggest laggard, dipping as much as 4 per cent. However, the index had retraced its losses and turned positive by early afternoon in New York.

Companies that generate a high proportion of their sales overseas outperformed those that rely on domestic sales, reversing a recent trend that had been encouraged by investor belief that Republicans would pursue an “America first” policy. Citigroup’s “foreign earners” basket rose 1.2 per cent, while its “domestic earners” list was roughly flat in Monday trading.

“Those are all modest moves against the Trump trades we have seen the past couple of weeks,” said Stuart Kaiser, Citi head of equity trading strategy.

The S&P 500 rose 0.7 per cent overall, while the Nasdaq Composite added 1.2 per cent. Energy stocks, which are often assumed to be beneficiaries of a Republican government, were the worst performers on the S&P. However, Monday’s moves were more likely to have been influenced by a drop in global oil prices. 

The Mexican peso strengthened by 0.7 per cent against the dollar on Monday. “The peso would be the most powerful beneficiary if Trump’s odds went down,” said Edward Al-Hussainy, global rates strategist at Columbia Threadneedle.

Earlier in Asian trading, Japanese defence stocks such as Mitsubishi Heavy, IHI and Japan Steel Works dropped sharply. They had recently soared to multiyear highs on a bet that a Trump victory and an era of US isolationism would force allies such as Tokyo to spend more on military equipment.

“The bigger picture is that investors probably still see Trump with an advantage, so in market terms, this isn’t a huge change in the narrative,” said Takeo Kamai, head of execution services at CLSA Securities in Tokyo.