The red-hot Washington debate over whether President Joe Biden will scrap his run for re-election is spilling into Wall Street, where traders are shifting money to and from the dollar, Treasuries and other assets that would be impacted by Donald Trump's return to office.
The recalibration of portfolios kicked off at the end of last week after Biden's disastrous debate with Trump heightened concerns the 81-year-old Democrat is too old to serve another term.
The trading action afterward was most acute in the bond market, where yields on benchmark 10-year Treasuries jumped as much as 20 basis points across the following days.
With speculation now mounting rapidly that Biden could drop out of the race — betting markets see less than a 50% chance he remains a candidate — investors are hastily making contingency plans to react to such an announcement during Thursday's Fourth of July holiday and the subsequent weekend.
One fund manager, speaking on condition of anonymity given the sensitivity of the topic, said he was heading into the vacation stretch biased toward the dollar and short-term debt as hedges against the spike in risk he reckoned would be sparked by a Biden withdrawal.
No president has opted against seeking a second term since Lyndon Johnson in 1968 and the election is just four months away.
"Markets have already been repricing election odds since the debate, so the news over the past 24 hours has really only added fuel to the fire," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.
The consensus among traders and strategists is a re-election of Trump, a 78-year-old Republican, would spur trades that benefit from an inflationary mix of looser fiscal policy and greater protectionism: A strong dollar, higher U.S. bond yields and gains in bank, health and energy stocks.
Even some 10,000 miles away, in Sydney, they're bracing. Rodrigo Catril, a strategist at National Australia Bank, said "everyone" is preparing trading plans in case Biden ends his campaign.
"Either way, the market is betting on Trump winning the election," said Catril. "It seems Democrats are stuck with very difficult choices, none of them easy, and none of them likely to yield a better outcome."
Here's how the so-called Trump trade is materializing across markets:
Dollar's Signal
The dollar gave one of the earliest signals as to how markets would adjust to a potential Trump victory, gaining in the hours after last week's debate. While the greenback has gotten a boost this year from the Federal Reserve's indications that it intends to keep interest rates for higher longer, the currency got a clear bump in real-time as Trump dominated the faceoff with Biden.
"A Trump victory raises the prospect of higher inflation and a stronger dollar, given his promise of more tariffs, and a tougher stance on immigration," said JPMorgan Chase & Co. strategists led by Joyce Chang.
Potential losers in the face of a rising dollar and Trump's expected support for tariffs include the Mexican peso and Chinese yuan.
Yield-Curve Trade
In the aftermath of the debate, money managers in the $27 trillion Treasury market reacted by buying shorter-maturity notes and selling longer-term ones — a wager known as a steepener trade.
A slew of Wall Street strategists have touted the strategy, including Morgan Stanley and Barclays Plc, urging clients to prepare for sticky inflation and higher long-maturity yields in another Trump term.
In a two-day span starting late last week, 10-year yields rose by about 13 basis points relative to 2-year rates, in the sharpest curve steepening since October.
