Trump seems to be on a quicker path to the nomination than eight years ago, when he didn’t lock it down until May. And polls show it would likely be a close contest between him and President Joe Biden, a shift from his long-shot status in 2016.
The result: Wall Street is already starting to game out the impact of Trump’s possible return to the White House.
“This time the markets will be aware of both possibilities and price them to some extent – we wouldn’t expect the same volatility as we saw in 2016 after the election,” said Daniel Tobon, head of G10 FX strategy at Citigroup Global Markets.
Nothing is assured, of course, and Trump’s prospects risk being upended by the ongoing criminal cases against him or a surprise turn of events at the polls. That’s made the election little more than background noise so far – for markets, at least, with the focus instead squarely on the trajectory of the economy, geopolitical tensions and when the Federal Reserve will start cutting interest rates.
But something of an early consensus is emerging, based in part on what happened last time around and the likely impacts of the few policies he’s staked out so far – like imposing 10% tariffs on imports and making his 2017 individual tax cuts permanent. The upshot is that it could put upward pressure on bond yields, bolster the dollar, and exert a drag on trading partners’ currencies.
Here’s a look at the market reaction to Trump’s 2016 victory and how it could play out if he heads to a second win this year:Bond Rally’s Fate
The US bond market is facing a far different dynamic than in 2016, when the central bank had just raised interest rates for the first time of its cycle and was poised to keep doing so. Those expectations – combined with a view that Trump’s tax cut plans would stimulate the economy – contributed to a deep bond-market selloff, pushing up 10-year Treasury yields in the fourth quarter by the most in more than seven years. Bond funds saw the largest outflows of cash since 2013’s “taper tantrum.”
The question this time around is to what degree Trump’s proposed policies – either as his party’s nominee or the incoming president – could alter the interest-rate cut expectations that are now priced into markets.
“It’s about tax and growth implications, deficit implications, regulatory implications, because that’s quite crucial for markets,” said Gennadiy Goldberg, head of US rates strategy at TD Securities.
But the fiscal impact of the election will likely be seen as more muted this time, in part because a key issue will be whether to extend Trump’s 2017 tax cuts when they expire next year, not necessarily pushing through new ones.