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The stories that matter about money and politics in the race for the White House
For some market heavyweights (and big egos), the worst possible outcome of the US presidential election is a victory for Kamala Harris.
An increasingly narrow or even fading lead in the opinion polls for the Democratic candidate, combined with a large increase in bets on her rival in the betting markets, have been enough to convince a good part of the fund managers macroeconomic hedging donald trump is back at the White House. Some wishful thinking of speculative investors (who lean white, male, and rich) could also be at play.
Political experts still often say that elections are a coin toss and that the betting markets They are not representative and are best ignored. BlackRock boss Larry Fink this week argument that the election result “doesn’t really matter” to the markets; a relaxed posture which it is fair to say is not universal. In any case, once unleashed, a political frenzy (at least among certain types of investors) is difficult to suppress.
Bankers collecting feedback from their hedge fund clients speak of an overwhelming consensus expectation of a Trump victory, an outcome they believe would point to higher U.S. government bond yields and a stronger dollar. This would be a result of his more inflationary policy tendencies, such as aggressive import tariffs and immigration crackdowns that are likely to accelerate wage growth. For supporters of this view, the deal with Trump is well underway.
This is developing now. Both long- and short-term US bond yields have rallied sharply over the past 10 days, reflecting a decline in prices. The two-year yield – a decent guide to where traders think benchmark interest rates are headed – has risen about half a percentage point to just over 4 percent. The 10-year yield has risen more strongly, to about 4.2 percent, while the dollar index has gained 4 percent.
Interest rate options markets, once again a happy hunting ground for speculators, are pricing in some pretty wild moves in US government bonds immediately after the vote, perhaps as much as 0.33 percentage points above the 10-year Treasury yield – a significant hit for this market.
The feeling now is that a Harris victory could turn these bets by speculative investors into the so-called “painful business.” This paints a picture of investors in all areas consumed by election fever. But that is not entirely correct.
Several things stand out here. One is that stocks continue to rise in a fairly orderly fashion: Flashes of volatility are limited to rates and currencies, again suggesting that investors as a whole are sitting back and refusing to get caught up in the speculative hedge fund game. coverage. Another is that it’s important to remember what else is happening in election week, namely a decision on U.S. interest rates and the release of new nonfarm payrolls data.
Furthermore, it is still possible to explain a lot of this volatility simply by the surprisingly optimistic economic data of late, particularly in the form of September’s spectacular nonfarm payrolls report. So the deal with Trump is underway, but it’s a bit messy.
“The opinion polls have definitely changed, not necessarily in favor of Trump, but with a fading momentum for Harris,” said Vasileios Gkionakis, a strategist in the multi-asset team at Aviva Investors. “But there is a lot going on in the underlying data: upside surprises in the US data and downside surprises for the rest of the world. Most of the increase in yields appears to be due to that.”
In fact, the recent market noise around Trump appears to greatly exaggerate his true impact on most investors’ portfolios. “From our perspective, while the narrative has changed a lot, market pricing is much more cautious,” Deutsche Bank analyst George Saravelos wrote in a note this week. For example, the value of the dollar was still in line with the interest rate gaps between the United States and other major economies, he said, with just a hint of politics on top. An all-out trade war and generous fiscal largesse would require the euro to fall by about $1, he calculated. Right now, it is some distance away from there, at $1.08.
U.S. stocks sensitive to tariffs had also been “moving largely sideways,” he noted. Overall, “the market has begun to price in an increasing likelihood of a Trump victory, but the degree to which this is impacting market prices is still quite modest.”
Despite the natural burst of nerves or excitement around the election, that caution remains the right course for all investors except those with a high enough risk tolerance to take the risk.
“People are really trying to figure out what Donald Trump would mean in terms of economic growth, monetary policy and inflation,” said Guy Stear, head of developed market strategy at Amundi Investment Institute. “But there are too many uncertainties,” he said.
If rate markets swung wildly after the election, fund managers could step in and pick up some bargains, he said. For now, however, “it is so uncertain that it is dangerous to make decisions at this time.” Patience remains the best policy.