President Biden's declining performance in interviews and debates has sparked speculation about his potential replacement. Markets are already reacting to the possibility of a new Democratic candidate and a Trump win, causing significant market shifts.
How We Got Here
The recent debate between President Biden and former President Trump has significantly impacted market sentiment. 81-year-old Biden's lackluster debate performance raised serious doubts about his viability as a candidate, with betting markets now seeing less than a 50% chance of Biden remaining in the race. This has led to market volatility, with Treasury yields jumping 20 basis points last week. According to Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, markets have been repricing election odds since the debate, with recent news adding fuel to the fire.
Market Reactions and Currency Shifts
In the wake of the debate, the dollar (DXY) experienced a notable uptick, driven by speculation of a Trump victory. Investors are betting on Trump's return to office, anticipating an inflationary mix of looser fiscal policies and greater protectionism. This has bolstered the greenback and caused yields on benchmark 10-year Treasuries to soar. The impact extends beyond U.S. borders, with currencies like the Mexican peso (MXN=X) and Chinese yuan (CNY=X) under pressure.
Currency Diversification
In light of this uncertainty, many investors are diversifying away from the dollar. The political instability in the U.S. is prompting a shift towards other currencies like the euro and yen, considered safer alternatives. Karl Schamotta, chief market strategist at Corpay, mentioned that Biden's performance has triggered a sharp rise in the odds of a Trump victory, leading to declines in trade-sensitive currencies like the Mexican peso and Brazilian real.
How Does This End?
If Biden withdraws, markets could see increased volatility as investors react. A Trump victory will significantly impact sectors like banking, energy, and health, which will likely thrive under his policies. The broader market could see gains due to deregulation and fiscal stimulus expectations. Conversely, a change in the Democratic nominee might bring different market dynamics. Kamala Harris, as a potential candidate, presents both opportunities and risks. Her leadership could provide stability but might also lead to tighter regulations. Joyce Chang from JPMorgan Chase & Co. noted that a Trump victory raises the prospect of higher inflation and a stronger dollar due to promises of more tariffs and tougher immigration stances.
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Dilantha is a former buy-side equity analyst who now contributes to Seeking Alpha, GuruFocus, TipRanks, and ValueWalk. He is the founder of Beat Billions, a premium investment research subscription service on Seeking Alpha’s Marketplace. He has appeared on CNBC and Bloomberg to discuss stock markets and the global economy.