Biden Out, Harris In: Markets Reassess US Presidential Race and the Trump Trade

This changes the stakes for the US presidential election, which was seemingly tilting in broad favor of the Republican Party and former President Trump after a series of events over the last few weeks, including the dismal performance of President Biden at the first debate, questioning his health, an assassination attempt on Trump, and a united front from his party at the Republican Convention last week.

But markets now have to brace for a more competitive race. Some of the Trump Trades could unwind, but not all. Some parts of the market could also be concerned about the odds of the first-time presidential candidate Harris to beat Trump. Let us assess what this closer race could mean for the markets:

1. More Uncertainty, Higher Volatility: The race for the White House could become much more open in the run upto November, compared to the Republican “Red Wave” that started to be expected in the last week. Political narrative will come to the fore as a market driver, and markets will turn much more attentive to campaign headlines and polls. This could mean higher cross-asset volatility because of the uncertainty that has been injected into the election.

    

2. Softer US Dollar: The haven characteristic of the US dollar could take a backseat, and the greenback could go back to focusing on the US macroeconomic and Fed policy play. The Fed is in a blackout period this week ahead of its July 31 policy announcement, which means we won’t get updates on committee views that could fuel further rate cut speculation. Focus will therefore be on the PCE print due later in the week to assess whether disinflationary trends continue, and the Fed could potentially be more open about the possibility of a September rate cut. This could bring downside pressure on the US dollar.

    

3. Broader US Indices Focus on Fed and Earnings: While volatility is spooked, policy direction could remain little different under Harris or Trump when it comes to fiscal spending. This means tech stocks and broader US indices could bring the focus back on key earnings that kick off this week, as well as the Fed rate cut expectations. Any dips in US tech stocks could continue to attract buyers if earnings and guidance continue to come in above expectations. Small cap stocks, that had a run higher amid expectations of tax benefits under a potential Trump presidency, could see some profit-taking and focus will be on the scope of soft-landing as well as earnings announcements.

    

4. Trump Trades Could Unwind: Specific Trump trades, such as higher defense and energy stocks or declines in clean energy, could face bigger risks of an unwind. There could also be a temporary sense of relief in non-US markets, particularly those in China and Europe amid a weakening threat of tariffs. Trump company names such as Trump Media and Technology (DJT) could also see some pullback after 13% gains last week.

    

5. Bonds Face More of the Same: Fiscal restraint is unlikely, whoever becomes the next US president. This means markets will continue to worry about the ballooning fiscal deficit, and the long-end will likely continue to face selling pressure and the curve could steepen with market aligning on the possibility of a September Fed rate cut that could bring the short-end yields lower.

It is crucial to remember that we are still more than three months away from the US election, and over time, market reactions will depend on each candidate's potential policy changes. What we can be certain of now is the heightened political uncertainty, which may lead to increased volatility for investors.

Key catalysts to watch for Harris’s nomination to translate into electoral success and market stability may include:

1. Harris’ first address scheduled for 11:30am Washington time on Monday, 22 July
2. Achieving internal alignment and presenting a united Democratic front (Democratic Convention scheduled from August 19-22)
3. Harris’ performance in the second presidential debate against Trump, scheduled for September 10
4. Selection of Harris's vice-presidential candidate
5. Poll results in key swing states
6. Effectiveness of Harris's campaign in energizing existing Democratic supporters
7. Success of Harris's campaign in attracting women voters
8. Increase in campaign aid for the Democratic party

Recent FX articles and podcasts:

• 16 Jul: JPY: Trump Trade Could Bring More Weakness
• 11 Jul: AUD and GBP: Potential winners of cyclical US dollar weakness
• 3 Jul: Yuan vs. Yen vs. Franc: Shifting Carry Trade Strategies
• 2 Jul: Quarterly Outlook: Risk-on currencies to surge against havens
• 26 Jun: AUD, CAD: Inflation Rising, Can Central Banks Stay on Pause?
• 21 Jun: JPY: Three-Way Pressure Piling Up
• 20 Jun: CNH: China Authorities Loosening their Grip, But Devaluation Unlikely
• 19 Jun: CHF: Temporary Haven Flows Unlikely to Fuel SNB Rate Cut
• 18 Jun: GBP: UK CPI Details and Elections Will Keep BOE on Hold
• 13 Jun: BOJ Preview: Tapering and Rate Hike Talk Not Enough to Boost JPY
• 10 Jun: EUR: Election jitters and ECB rate cut add to downside pressures
• 30 May: JPY: Intervention fears clash with carry trade attractiveness
• 29 May: AUD: Hot inflation reaffirms rate cuts remain some way off
• 15 May: AUD: Tailwinds to stay despite Budget impact
• 7 May: AUD: RBA fails to meet the hawkish expectations
• 3 May: JPY: Staying on intervention alert

Recent Macro articles and podcasts:

• 8 Jul: Macro Podcast: What a French election upset means for the Euro

• 4 Jul: Special Podcast: Quarterly Outlook - Sandcastle economics
• 1 Jul: Macro Podcast: Politics are taking over macro
• 28 Jun: UK Elections: Markets May Be Too Complacent
• 24 Jun: Macro Podcast: Is it time to diversify your portfolio?
• 12 Jun: France Election Turmoil: European Equities Amidst the Upheaval
• 11 Jun: US CPI and Fed Previews: Delays, but Dovish
• 10 Jun: Macro Podcast: Nonfarm payroll shatters expectations - how will the Fed react?
• 3 Jun: Macro Podcast: It is a rate cut week

Weekly FX Chartbooks:

• 15 Jul: Weekly FX Chartbook: September Rate Cuts and the Rising Trump Trade
• 8 Jul: Weekly FX Chartbook: Focus Shifting Back to Rate Cuts
• 1 Jul: Weekly FX Chartbook: Politics Still the Key Theme in Markets
• 24 Jun: Weekly FX Chartbook: US Presidential Debate is the Big Market Unknown
• 10 Jun: Weekly FX Chartbook: US CPI and FOMC dot plot have a low dovish bar
• 3 Jun: Weekly FX Chartbook: ECB and Bank of Canada likely to cut rates

FX 101 Series:

• 15 May: Understanding carry trades in the forex market
• 19 Apr: Using FX for portfolio diversification
• 28 Feb: Navigating Japanese equities: Strategies for hedging JPY exposure
• 8 Feb: USD Smile and portfolio impacts from King Dollar