Joe Biden’s surprise announcement about withdrawing from the presidential race has sent shockwaves through global markets. Investors, reacting swiftly, have unwound many of the so-called “Trump trades” that were built in anticipation of a second term for President Trump. As a result, the dollar slipped 0.1% against a basket of currencies, and U.S. Treasury yields edged lower, with the 10-year yield dropping 0.03 percentage points to 4.20%.
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Treasuries and Uncertainty
The drop in Treasury yields signals increased uncertainty. Traders suggest that Biden’s withdrawal injects new unknowns as the November presidential election approaches. Ray Attrill from National Australia Bank noted, “In the next couple of weeks, there’s going to be more noise than signal for markets in what comes out on the political side.” This sentiment captures the mood of many investors who now face greater market indecision.
Impact on Long-Dated Treasuries
Previously, long-dated Treasuries had been under pressure as investors bet on Trump’s re-election, expecting his tax policies to boost inflation, which is typically negative for bonds. However, these dynamics were complicated by the potential for a Federal Reserve interest rate cut amid falling U.S. inflation.
Stuart Kaiser of Citigroup highlighted in a note to clients that Biden stepping aside is a “headwind for Trump trades” and could add an “uncertainty premium” to the Democratic National Convention dates in August. This development has shifted the odds of the election back to a more even 50/50 split, according to Kaiser.
Mixed Reactions in Stock Markets
In the stock markets, reactions were mixed. S&P 500 futures rose 0.2% ahead of the Wall Street opening, while European stocks bounced back from last week’s losses, with the Stoxx Europe 600 climbing 0.6% in early trading. In contrast, Asian markets saw significant declines. Japan’s Nikkei 225 fell 1.3%, South Korea’s Kospi dropped 1.4%, and Australia’s S&P/ASX 200 declined by 0.7%.
Asian Markets and Defense Stocks
The Asian market downturn is partly attributed to the unwinding of positions that had been built on the expectation of a clear Trump victory. Defense industry stocks in Japan, such as Mitsubishi Heavy (MHVYF) and IHI (TSE:IHI), experienced sharp declines. IHI led the losses with a 3.7% drop, reflecting investor concerns about the future of U.S. isolationist policies under Trump.
Broader Market Narrative
Despite the immediate reactions, some analysts believe that the broader market narrative remains relatively unchanged. Takeo Kamai of CLSA Securities stated, “The bigger picture is that investors probably still see Trump with an advantage, so in market terms, this isn’t a huge change in the narrative. Asian markets are certainly going to be taking a lot of their direction on this from the ‘mother market’ in the U.S.”
