European stock markets are in the red early on Tuesday despite more positive signals from the US, with London, Frankfurt and Paris all down between one-third and one-half a per cent.
Federal Reserve chair Jerome Powell leant into towards a September rate cut. Front-end yields slid, with the two-year Treasury yield sinking to its lowest since February. Bitcoin came back down off a one-month high, gold rallied to a two-month peak very close to the all-time high, crude fell to its weakest in a month. The Dow Jones rose half a per cent to a new record. Apple led the way as Morgan Stanley named the company its top pick, sending the shares to a record high. Goldman Sachs also rose after posting a doubling in profit. The S&P 500 notched a fresh intraday high, closing a little ways off that, up 0.28 per cent for the session.
Investors did not seem bothered by a perception of greater uncertainty in a broad sense (assassinations can be hinge points for history) as the result of the election now seems more certain. So, we can feel more uncertainty now, even if the probability of the outcome is higher. Donald Trump kicked off the Republican National Congress in Milwaukee by announcing Ohio’s JD Vance as his running mate. Markets are starting to really discount a Trump win, factoring in a bit more inflation and some stock-specific positioning.
What to expect from Trump 2.0? Higher bond yields, bear steepening, more inflation, more debt, bullish defence and oil & gas stocks...those are the kind of things we are hearing about markets if Trump wins the presidential race this November. After the first debate went so badly for Joe Biden, and Trump later survived an attempted assassination, the odds on the former president winning for a second time have shortened a lot. First of all, debt. We have to consider the fiscal outlook and by most accounts a Trump White House should mean more debt, which in turn would lead to higher bond yields and a steeper yield curve. Whilst there is less room for a repeat of his first-term fiscal expansion and tax cuts, which sent equities roaring higher, I think this remains the direction of travel for Trump 2.0. And other policies, such as tariffs, will be important. For instance, these could spark a rebound in inflation, which could push the Fed to raise rates.
We have seen some bear steepening – the view is that Trump back in the White House is going to pile on more debt, cut taxes and drive growth, which ought to be positive for stocks, negative for bonds. Markets seem to be, tentatively at least, positioning for a more inflationary environment than we have now. Which might explain why the Fed is playing for time. A Trump presidency would also mean higher tariffs and more trade disruption. He has called for blanket tariffs of 60 per cent against Chinese goods, 10 per cent against products from the rest of the world. These are in addition to existing tariffs he and Biden have imposed, including the 100 per cent tariff on Chinese-made electric vehicles (EVs). Trump has even suggested he could replace the Federal income tax by using tariffs.
More protectionism risks further fragmentation of commodity markets, disruption to supply and higher prices generally. This would further stoke inflationary pressures. Within this we could see some volatility in Natural Gas prices due to the twin risk of a) US LNG exports hitting the market and b) any easing in Russian sanctions that allow Russian gas back on the market.
Finally, bitcoin has jumped a lot since the weekend with Trump seen broadly as move crypto friendly. In addition, bitcoin could be a beneficiary if we get more macro uncertainty, trade policy upheaval, rates volatility etc.
The Trader is written by Neil Wilson, chief market analyst at Finalto
