According to The Washington Post, the Leadership Now Project, an organization composed of hundreds of business leaders, has sent a letter to the White House suggesting that current US President Biden abandon his bid for re-election.
The situation of the US presidential election is affecting the nerves of the global market, and the heated debate over whether Biden will give up running for re-election has also spread to Wall Street. At present, traders are transferring funds to the US dollar, US treasury bond bonds and other assets that may be affected by Trump’s return to the White House – “Trump Trading” is making a comeback.
Currently, the consensus on Wall Street is that Trump’s re-election will stimulate a combination of inflation trading benefiting from loose fiscal policies and greater protectionism, such as the US dollar, US bond yields, and banking, healthcare, and energy stocks.
However, while the “Trump deal” reappeared, a long silent financial problem – the US debt crisis – also attracted attention again.
In a report shared by Nomura to the Daily Economic News, Rob Subbaraman, Nomura’s head of global macro research, analyzed that in the worst-case scenario, the US election could catalyze the country’s fiscal balance to a critical point, similar to the debt crisis experienced by some emerging market countries. Trump’s victory may lead to market expectations of more fiscal stimulus and further inflation. A more extreme scenario is that he may halt debt repayment and trigger a default.
The ‘Trump Deal’ is making a comeback
According to a report by The Washington Post on July 5th, the Leadership Now Project, an organization composed of hundreds of business leaders, has sent a letter to the White House suggesting that current US President Biden abandon his bid for re-election. This letter has been signed by 168 people, including Christy Walton, the daughter-in-law of the founder of Wal Mart, Michael Novogratz, a billionaire, and Paul Tagliabue, the former president of the NFL.
The media also reported that an increasing number of Democratic senators believe that President Biden cannot continue his campaign. According to two insiders, Virginia Democratic Senator Mark R. Warner is attempting to rally a group of Democratic senators to demand that Biden withdraw from the presidential race.
On the same day, in an interview with ABC News, Biden stated that he was “exhausted” and “sick” on the night of the debate, but still “in good condition” and no one had told him to “undergo cognitive and neurological tests”. He also stated that no one is more qualified than himself to become president or win this election.
Prior to the interview, Biden had just delivered a speech in the swing state of Wisconsin, stating that he would not yield to pressure to withdraw from the election and would “defeat Trump”.
JPMorgan Chase stated in a report on July 3 that if Biden falls behind Trump by 8% to 10% in key swing states such as Michigan, Wisconsin, and Pennsylvania in polls over the next three weeks, he will face enormous pressure to withdraw from the race. Currently, Trump is leading in swing states, with a lead ranging from a draw to 5.6%.
With the changing situation of the US election, the market has begun to adjust its investment portfolio. The consensus on Wall Street is that Trump’s re-election will stimulate a combination of inflation trading benefiting from loose fiscal policies and greater protectionism, leading to a strengthening of the US dollar, higher yields on US Treasury bonds, and increased returns on banks, healthcare, and energy stocks.
Among all the “Trump Trading” markets, the bond market has the most intense trading activity. Investors have stepped up buying short-term treasury bond bonds and selling long-term treasury bond. Big banks, including Morgan Stanley and Barclays, are betting that the yield curve will steepen. From June 28 to July 1, the yield of benchmark 10-year US treasury bond bonds rose for three consecutive days, and then fell back a few days later. As of 19:43 on July 5, the yield of 10-year US treasury bond bonds was 4.335%.
And currency is the market that sends signals earliest. According to Bloomberg analysis, although the US dollar has been boosted this year by the Federal Reserve’s suggestion to maintain interest rates at higher levels, it has also risen as Trump’s chances of winning the debate increase, as he promises to impose more tariffs and take a tougher stance on immigration issues.
In the US stock market, medical insurance companies, banks, and energy stocks are being favored by investors. Bloomberg reported that these stocks are expected to benefit from Trump’s policies on regulatory environment, mergers and acquisitions, and trade relations.
Tom Essaye, President and Founder of Sevens Report, stated that Republican policies are typically more favorable for business development.
In the upcoming presidential election, the direction of taxation is a key issue facing the market.
Last week, the bond market demonstrated this. Due to concerns about the increase of deficit, the yield of US treasury bond bonds soared, because after Biden’s poor performance in the debate, investors began to consider the potential impact of Donald Trump’s second election as president.
This is one of the most important policy issues of the past decade, “Greg Valliere from AGF Investments told me.
The reason is as follows: Several provisions in the 2017 Tax Reduction and Employment Act will expire next year, reducing the corporate tax rate from 35% to 21% and lowering the personal tax rate.
The budget proposal issued by the US government earlier this year called for a minimum tax rate of 25% for the richest Americans and a maximum income tax rate of 39.6% for those earning more than $400000 a year.
For businesses, President Biden has proposed raising the corporate tax rate to 28%, while a Republican victory could lower the tax rate to 15%.
The enthusiasm for tax cuts drove the stock market up in 2017, and Wall Street believes that Trump’s re-election as president will make these tax cuts more likely to be extended.
However, as we have seen in the market trend this week, professionals warn that this may not necessarily be a home run for investors.
Keith Lerner from Truist told me that extending tax cuts may not necessarily be good news for the market, emphasizing the importance of bond retail investors when assessing the risk of increased debt.
The bond market is always likely to have a negative view of candidates’ potential actions to lower taxes, extend current policies, or increase spending, “Lerner said.
For those preparing investment strategies, UBS Chief Investment Officer Solita Maselli pointed out that the enthusiasm brought by reducing taxes and relaxing regulations may weaken due to trade issues.
As a result, “interest rates and the US dollar may initially rise,” Marcelli wrote in a report to clients
But please remember, it’s still too early and the market may be too eager to assume that a Republican victory will guarantee tax cuts.
Valier believes that as more and more Republican lawmakers worry about worsening fiscal conditions, both parties are “hesitant to extend tax cuts”.
The Congressional Budget Office (CBO) estimates that extending the Tax Cuts and Jobs Act will increase the deficit by $4.6 trillion over the next decade, which is $1.1 trillion more than previous estimates. At present, the total federal debt of the United States exceeds $34 trillion, and it is expected that the government will spend nearly $900 billion on interest payments by 2024.
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