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'Trump Trade' Cools, But Market Doubts Emerge

AInvestFriday, Nov 8, 2024 8:14 am ET
2min read

After Trump's election victory, the Trump trade gradually cooled as investors began to doubt whether Trump would truly push forward with his proposed aggressive tariff plans during his presidency.

As of Thursday's close, the dollar's rapid surge after the election has largely retraced, with the US Dollar Index currently at 104.51. US Treasury yields have also returned to their normal range after two days of fluctuations.

These market movements indicate that investors are cautiously weighing whether Trump can fulfill his campaign promises. The market's focus is gradually shifting to other key factors, including the Federal Reserve's path of monetary easing and potential fiscal stimulus measures from other countries.

Vishnu Varathan, Head of Economics and Strategy at Mizuho Bank in Singapore, said:

There's a sense that even the most exuberant Trump Trade investors are taking a step back to think: at this point, are the bets overdone? Traders are thinking about the execution and how some of his policies can be transmitted effectively.

The market is quickly arbitraging while it can still lock in profits.

Earlier this week, the Trump trade, including bullish bets on the dollar and bearish bets on US Treasuries, was active due to expectations that Trump's policies would stimulate inflation and maintain higher interest rates for a longer period.

As time goes on, the market's sentiment towards Trump's policies is gradually cooling. Assets under the Trump trade have been consolidating since his election victory.

This is because the market is quickly arbitraging while it can still lock in profits. When Trump's economic plans are settled, everything will change again. His proposed reforms could lead the world's largest economy into uncharted territory.

Daniel Alpert, Managing Partner at Westwood Capital, said: People don't like missing opportunities to profit, so they're rushing in and picking some stuff up that they can unload quickly enough before it all comes down. There's still significant volatility in this market ... And I think we'll still see a significant reversal of these trades as the news begins to dawn.

For Investors, a key question is to what extent Trump's tariff threats can become reality.

Alvin Tan, Head of Asia Foreign Exchange Strategy at RBC Capital, said: There is a lot of skepticism about Trump actually pursuing his proposed policies, particularly on tariffs, and the market is underestimating Trump on trade policy — the US President has broad authority to implement import tariffs.

Analysts believe that if the Republicans continue to control the US House of Representatives, a grand slam victory will pave the way for Trump's tax cuts, immigration, and trade policies. If Trump fulfills his campaign promises, the US could see larger deficits and soaring inflation, with deported immigrant workers potentially leading to a significant decline in economic growth.

If the House goes Republican, there will be absolutely no limits to what tariff policy Trump can enact ... and to the extent that he does that, he's going to create the worst of both worlds, with higher domestic prices for goods and some services, and no overall improvement to the jobs picture, Tan continued.

All of that doesn't model out well for the future, Art Hogan, Chief Market Strategist at B Riley Wealth Management, pointed out.

But the future is not now.

Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.