The news flow out of the weekend was obviously punctured by the near catastrophe over former President Trump’s speech in Pennsylvania. What was already shaping up to be a likely Trump presidential win jumped to a near-landslide with betting markets pricing a ~70% winning chance for the former president following the assassination attempt.
While the USA might be a divided country with increasingly polarizing views, what the country does unite on are issues involving homeland security and attacks on political figures. As a possible tangent, the 1981 assassination attempt made on former President Reagan might have contributed to a ‘red sweep’ in the following election, with the current cycle even more potent with November just a few months away. The election is now likely now up to Trump to lose, with the liberal media and opposition will have to be more reserved with their hardline criticism for the rest of the election campaign.
Macro markets will likely trade with a Trump-win as the default scenario, with significant repercussions across all asset classes. While we are no political experts, it’s not a far-fetched idea to believe that the 2nd Trump administration will likely incur significant more hardline policies.
At the moment, GOP and Trump supporters will believe that:
The opposition tried to jail a former president for a 700-year sentence as a political witch-hun
Recent changes to ‘non-citizen’ voting rules which would have likely brought significant immigrant votes against Trump
An assassination attempt made in broad daylight with significant lapses in security detail coverage
In response, in the event of a Trump 2nd-term, markets will probably assume:
Aggressive fiscal spending and spendthrift tax policies
Further escalation of US-China tensions
Additional pressures on Europe to pay up $200bln+ for NATO protection, especially in light of the ongoing Russia-Ukraine conflict
Closing off borders to illegal immigration
Aggressive ‘house-cleaning’ of key civil servants, government employees, and other Washington ecosystem staff as an extension of the conservative Supreme Court pivot from the 1st term
Bond yields will likely see a bear steepening move, as aggressive spending plans will worsen what is already a dire bond supply and budget deficit scenario, with Trump’s first term driving a ~200bp move higher in 10yr yields over 18 months.
A potential Trump 2nd-term is met against the backdrop of slowing US economic growth and inflation, with last week’s CPI cooling to the slowest pace since 2021 thanks to a long-awaited slow-down in housing costs. Core CPI rose 0.1% from May, the slowest advance in 3 years, while the overall measure fell for the first time since Covid.
Markets definitely saw Thursday’s CPI as a watershed moment for the current cycle, with the markets pricing in 95% chance of a rate cut in September, and one would imagine that a Trump administration would certainly be pressuring the Fed to ease rates more aggressively in 2025 as the next salvo of an economic stimulus.
Speaking of the slowing economy, earnings from the largest US banks confirmed a weakening consumer, with most banks setting aside more cash to cover delinquent customer loans, with Citigroup/Wells Fargo/JPM all increasing loan writeoffs as consumers have spent through most of their pandemic savings. Credit card delinquencies have risen to the highest level in 30 years for small banks, and the highest in 10 years across the entire banking sector.
Similarly, Friday’s Michigan consumer sentiment missed expectations for the 4th consecutive month, with respondents citing weakening labour markets against persistent high prices keeping a lid on sentiment. The official survey noted: “Almost half of consumers spontaneously expressed complaints that high prices are eroding their living standards, matching the all-time high reached two years ago”.
Outside of the US, last week’s data also confirmed an underwhelming recovery in the Chinese economy, with a CPI miss that printed 0.2% YoY vs expectations of a 0.4% YoY increase, and both lending and credit growth hitting a fresh record low in June with meagre end user demand. Combined with the earlier miss in new yuan loans, TSF, and weak imports (-2.3% YoY vs +2.5% expected), officials will no doubt be disappointed with the pace of recovery as we head into the July Plenum.
Back on US equities, the SPX continues to hover around ATHs with reluctant bears throwing in the towel after one another. JPM estimates that long equity future positions are at back their highest levels (vs open interest %) over the past 10 years, while cash allocations have breached their lowest levels going back to 2000. However, despite higher prices, new global equity resupply remains negative for the 3rd consecutive year as the IPO market remains shut for most issuers, as the ‘have and have-nots’ environment continues for SPX constituent stocks.
Interestingly, what macro bears might be surprised to find out is that the bond-stock correlation (yields don’t always move unilaterally with stock prices) has been flashing that the US economy was never in any danger of a recession over the past 2 years. The correlation has pivoted between expectations of a soft-landing to no-landing, and occasional flashes of expansion during spurts of strong data. This is a sharp reminder that while macro assets are extremely forward looking and auto-correcting, it’s often the interplay between assets that tell the full story, not the absolute level of a one-dimensional variable (like the inverted yield curve). Keep an eye out for when yields fall in conjunction with stock prices to get the first real hint that markets finally believe we are heading towards a slowdown phase.
On digital assets, crypto obviously benefitted from Trump’s jump in inauguration odds, with BTC jumping back about $62.5k, rallying over 10% on a week-on-week basis after the recent dreadful sell-off. The Bitcoin conference has apparently reconfirmed Trump’s in-person attendance during the Nashville conference in late July, signaling the administration’s continued support for crypto as a campaign statement.
Flows wise, spot BTC ETFs saw large inflows on Friday, totally $310mm even just ahead of the weekend events. This marked the largest recorded inflows since June 5th, with investors finally returning to buy the dip following the belief that the German government has sold all of its BTC according to wallet data tracker Arkham. With that out of the way, the market still has to contend with Mt. Gox repayments where ~140k ($8.5B) of BTC supply are expected to hit the market, though there is certainly more light at the end of the tunnel with an imminent September rate cut and a likely Trump victory providing support for crypto assets. Price action wise, it’s also assuring that BTC managed to hold the low $50k area against the recent sell-off, which was the break-out area just following the January BTC approval, and sentiment will likely pivot back to selling puts / buying dips going forward as we get close to the end of summer and the eventful Q4 period to end a memorable year.
Good luck and stay strong friends!
