The failed assassination attempt against former U.S. president Donald Trump adds another layer of uncertainty for investors already grappling with subsiding inflation, expensive stocks and the threat of political instability.
But one thing has become clearer since the shooting at a Saturday rally: Mr. Trump’s chances of winning the White House, already on the upswing over the past two weeks, have grown considerably brighter.
That means potential tax cuts and higher tariffs – both considered inflationary policies by economists – have been brought into sharper focus.
“The risks around a second Trump term are arguably skewed towards outcomes in which Treasury yields and the dollar rise sharply, to the point that it could damage the outcome for the economy and equity markets,” Jonas Goltermann, deputy chief markets economist at Capital Economics, said in a note.
On Monday, in the first day of trading after the shooting, specific assets that are closely associated with Mr. Trump received a noticeable lift.
Trump Media and Technology Group Corp. DJT-Q, the social-media company that has been reflecting the likelihood that he will be elected to a second presidential term, soared 33 per cent.
Bitcoin rose 5.9 per cent. Mr. Trump has vowed to take a lighter regulatory approach to cryptocurrency, proclaiming at a June rally that he will “end Joe Biden’s war on crypto.”
And the KBW Nasdaq Bank Index, a basket of U.S. bank stocks that might also benefit from looser regulations under Mr. Trump, rose 1.8 per cent – though the gains come after relatively upbeat quarterly corporate earnings for the sector.
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“Overweight U.S. banks is our preferred ‘Trump Trade.’ Easier valuation setup, stable fundamentals, lesser tariff risk combined with incremental deregulatory inertia give this sector a good risk-reward setup,” Scott Chronert, U.S. equity strategist at Citigroup, said in a note.
More broadly, there was little to suggest on Monday an immediate shift in direction from market trends that have been unfolding over the past several weeks.
The S&P 500 gained 0.4 per cent in early afternoon trading, stretching its year-to-date gain to 18.3 per cent.
Bond prices dipped slightly, pushing the yield on the 10-year Treasury bond above 4.2 per cent. Yet the yield, which moves in the opposite direction to bond prices, remains well off its recent high of about 4.7 per cent in April.
The price of gold, which has been creeping higher this year, rose to US$2,430 an ounce, up 0.4 per cent.
And while the CBOE VIX volatility index, which reflects investor anxieties, rose 4.6 per cent to 13, the level remains close to its lows over the past year. The VIX is down from a recent high above 20 in October, when inflation was stubbornly high, suggesting that investors remain relatively calm after the weekend violence.
These moves suggest that broader forces that kicked in earlier this year remain at work.
The big one: Subsiding U.S. inflation – the consumer price index declined to 3 per cent in June from 3.3 per cent in May – has strengthened the case for the Federal Reserve to begin cutting its key interest rate in September, bolstering the bullish case for stocks and bonds.
“At one point, financial markets wondered if the Fed would cut rates even once this year; now, there’s talk of three moves after the ‘super good’ June CPI report,” Jennifer Lee, senior economist at Bank of Montreal, said in a note.
Despite Monday’s muted reaction to Mr. Trump’s rising chances of securing a second presidential term, Ian de Verteuil, an analyst at CIBC Capital Markets, expects that the market reaction could be very different from his first term.
That’s because the economic backdrop is now different, with bigger deficits and higher borrowing costs, while stock valuations have also expanded – setting up a far more challenging environment for investors.
“If Trump is re-elected, it is reasonable to assume larger deficits, higher tariffs, less regulation and a Federal Reserve less independent than in the recent past. This certainly suggests a bump in long rates could repeat itself, but a meaningful equity rally is unlikely,” Mr. de Verteuil said in a note.