High Stakes: Investors Start Betting on Trump’s Political Comeback

High Stakes: Investors Start Betting on Trump's Political Comeback

Wall Street Positions for Potential Trump Victory After Debate

As President Joe Biden faltered during Thursday night’s debate, Wall Street traders began adjusting their portfolios in anticipation of a possible victory for former President Donald Trump in November. Analysts at State Street observed that market participants started factoring in a higher likelihood of Trump securing a second term.

Noel Dixon, a global macro strategist at State Street, noted that this shift began during the debate. “Spreads between two-year and 10-year Treasury notes started becoming more sensitive to Trump’s favorability,” he said, citing State Street’s MediaStats Election Indicator. This trend is likely due to rising inflation expectations tied to Trump’s policies, which include tariffs and mass deportations.

Prior to the debate, Trump already held a slight polling advantage in swing states. With Biden’s performance casting doubt on his capabilities, market participants are now increasingly focusing on the potential policies Trump might implement if he returns to the White House.

Wall Street is generally optimistic about Trump’s plans to lower taxes and reduce regulations. However, significant changes to immigration and trade policies could introduce risks of higher inflation and lower growth, leading to stagflation, according to Morgan Stanley strategists Matthew Hornbach and Guneet Dhingra. They recommend derivative investments that would perform well as the yield curve steepens amid increased election season risks and potential Federal Reserve interest rate cuts.

With Trump’s debate performance boosting his advantage, Barclays suggests investors consider hedges against future inflation. Yields on 10-year Treasury notes surged on Monday as confidence in a Trump victory solidified.

Despite the growing likelihood of policy changes under Trump, substantial uncertainty remains regarding the extent of these changes, according to Goldman Sachs economists Alec Phillips and Tim Krupa. Furthermore, ongoing speculation about the Democratic ticket adds multiple sources of uncertainty to the election outcome.

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