Analysis: After trial, investors weigh Trump 2.0 factor as election looms

Federated Hermes

03/06/2024 06:00

By Saqib Iqbal Ahmed
       NEW YORK, June 3 (Reuters) - Donald Trump last week
became the first former president convicted of a felony, but
Wall Street believes he still has a solid chance of winning the
November election and is gaming out how a second term for the
Republican candidate could impact markets. 
    Investors said a Trump victory could broadly boost the stock
market and buoy the dollar. But his proposed tariffs and
extended tax cuts could also stoke inflation and hurt U.S.
government bonds, they said. 
    Market participants said it remained too early to gauge how
Trump's election prospects will be affected by his conviction
for falsifying documents to cover up a payment to silence a porn
star. The verdict, which Trump said he would appeal - does not
prevent the former president from campaigning or taking office
if he wins the election.
    Recent polls showed U.S. President Joe Biden, a Democrat,
and Trump nearly tied in the presidential race, which some
believe could be swayed by macroeconomic factors as much as
political ones. 
    The options market continues to price a pickup in volatility
around the vote, suggesting investors are bracing for political
uncertainty.
    Here is an early look at how investors think Trump 2.0 might
affect stocks, bonds and currencies.

    
    STOCKS
    The S&P 500 rose 68% through Trump’s first term, which was
marked by tax cuts and infrastructure spending as well as a
trade war with China and the start of the COVID-19 pandemic. The
benchmark index is up 38% so far under Biden.
    An analysis by LPL Financial on Friday showed the S&P 500,
which is up about 9% year-to-date, has risen alongside Trump’s
election odds this year, as measured by betting site Predictit.
At the same time, Biden's election odds have remained negatively
correlated to the S&P 500 since February, the study showed.
    Some investors believe a second Trump term could be
supportive for equities, especially if Trump is able to avert
tax hikes promised by Biden. Much would depend on the makeup of
Congress.
    "In a Trump administration with a divided Congress or with a
Republican clean sweep, we can say, a corporate tax hike is off
the table," said Sonu Varghese, global macro strategist at
Carson Group.
    A second Trump White House would also seek to reduce the
power of U.S. financial regulators, according to a Reuters
report. That could be another positive for stocks, especially
small cap companies, which may find it more expensive to comply
with regulatory requirements, wrote Stephen Auth, chief
investment officer, equities at Federated Hermes.
    Trump's promise to support fossil fuel production and a
relatively more business-friendly approach to environmental
regulation could also boost sentiment in the energy sector, a
Nomura report said.
    Tariffs and trade wars, however, are potential spoilers.
    Trump has floated the idea of tariffs of 60% or higher on
all Chinese goods and a 10% across-the-board tariffs on goods
from all points of origin in a bid to eliminate the U.S. trade
deficit.
    Deutsche Bank analysts said trade protectionism could act as
a “negative supply shock,” raising revenues at the expense of
weaker growth and higher inflation.
    Multinational companies deriving revenues from China or with
deep supply chain links there could also be vulnerable, Carson's
Varghese said.
        Trump campaign National Press Secretary Karoline Leavitt
said in a statement that his “pro growth,
anti-inflation economic policies will quickly bring down prices,
reduce interest rates, and lower long-term debt levels, which
will benefit all Americans, including investors.” 
  
    Meanwhile, at least one stock appeared to have an immediate
reaction to Trump’s conviction: shares of Trump Media &
Technology Group  DJT.O , majority owned by Trump, fell 5% in on
Friday.
    
    BONDS AND RATES
    Republicans, as well as Democrats, have vowed to reduce
deficit spending and debt levels. But Trump policies such as
extended tax cuts could contribute to the yawning U.S. fiscal
deficit and push up inflation, investors said.
    That, in turn, may hurt demand for U.S. debt, pressuring
bond prices and driving up yields. 
    Trump’s tax proposals “would be a big drain on revenues, and
I think the bond market wouldn’t react well to that," said John
Velis, FX and macro strategist for the Americas at BNY Mellon. 
    Inflation and fiscal expansion could lead the Fed to raise
interest rates, another path to higher yields, analysts at
Nomura said. 
    Trump's tariff policies could also hurt demand for U.S. debt
among foreign investors, said Christopher Hodge, chief economist
for the United States at Natixis. Foreign holdings of U.S.
Treasuries surged to a record high of $8.09 trillion in March,
rising for a sixth straight month, data from the Treasury
Department showed earlier this month.
    
    CURRENCIES 
    The dollar fell about 10% against a basket of currencies
during Trump’s first term. But Trump’s presidency also featured
a two-year period that saw the dollar gain about 15%, boosted
in-part by safe-haven demand in the face of trade policy
worries. 
    Politico reported in April that economic advisors close to
Trump were debating ways to devalue the U.S. currency, a move
that could buoy U.S. exports but also spark an inflationary
rebound and endanger the dollar’s position as the world’s
dominant currency. 
        Some investors, however, believe the dollar could find
support if Trump’s policies lead to higher U.S. interest rates
and stronger growth.
    "Between elevated U.S. interest rates and tariffs, a Trump
presidency could very well keep the dollar stronger for longer,"
said Jonathan Petersen, senior markets economist at Capital
Economics.
    Increased trade tariffs could also spell volatility for
currencies such as the Mexican peso and Chinese yuan, which
experienced big swings during Trump’s first term, Petersen said.
Smaller European currencies including the Swedish krona and
Polish zloty could also be affected, since they are particularly
sensitive to risk sentiment and likely to be impacted by
potential tariffs, he said. 

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Trump: S&P 500 and the U.S. dollar    https://tmsnrt.rs/4aCcpS4
Stock sectors under Trump    https://reut.rs/4aN5l54
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 (Reporting by Saqib Iqbal Ahmed; Additional reporting by Davide
Barbuscia and Lewis Krauskopf; Editing by Ira Iosebashvili)
 ((Ira.Iosebashvili@thomsonreuters.com;))