Donald Trump’s from-the-hip style may start making financial markets volatile again — and that’s just fine for a breed of global fast-money traders who thrive on that.
With he and President Joe Biden running neck-and-neck ahead of their first debate Thursday night, investors have already been trying to game out how the Republican’s return to the White House could affect everything from the electric-vehicle industry to the direction of long-term interest rates.
Markets, as a rule, don’t like that kind of uncertainty. But for a subset of hedge funds that swoop in and out whenever big swings and anomalies make prices look briefly out of whack, that’s almost beside the point.
What they see in Trump is far more simple: Memories of the opportunities that arose during his four years in office, when his comments and social-media posts sometimes surprised investors, triggering dramatic short-term moves in the prices of stocks, bonds and currencies.
“Politics aside, if you ask a trader whether he wants placid Biden or stormy Trump, the trader is going big wave surfing – so it’s Trump,” said Calvin Yeoh, portfolio manager at hedge fund Blue Edge Advisors in Singapore. “Trump is more volatile and unpredictable.”
During the Biden years, of course, there’s been no shortage of volatility. The inflation surge, Russia’s war in Ukraine, and the Federal Reserve’s rate hikes all did plenty to whipsaw markets. As a result, some broad measures of expected market swings have been higher than they were during much of Trump’s tenure, and it’s possible that conflicts with Republicans over issues like the debt ceiling could escalate if Biden wins a second term.
Yet Biden has hewed to a traditional style honed by a decades-long career in Washington. By contrast, Trump relished communicating directly with the public through Twitter posts, leaving traders scrambling to determine the implications.
With the election still more than four months away, it has so far been overshadowed in markets by the strength of the economy and speculation about when the Fed will start dialing back interest rates. Even so, there’s been some early preparation for heightened volatility around the November election, particularly if the outcome is in doubt.
“The consensus view is that Trump will create volatility,” said Vineer Bhansali, founder of the Newport Beach, California-based asset-management firm LongTail Alpha. “The market is already priced for that to happen. So the surprise will be if Trump wins and actually there is less volatility.”
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Trump’s initial victory in 2016 dealt a jolt to the bond market. Ten-year Treasury yields jumped nearly a full percentage point by December on anticipation that his tax-cut plans would spur the economy and prod the Fed to speed up its rate hikes.
While in office, his comments and social-media posts sometimes sent ripples through the markets. In 2017, for example, Puerto Rico bonds tumbled when he suggested that the island’s debt would need to be erased completely after it was devastated by a hurricane — only to rebound once traders realized the issue would remain in the hands of the court already overseeing its bankruptcy. Inc.’s stock was dragged down the following year when Trump railed against the retailer’s shipping arrangements with the US Postal Service following a report he was “obsessed” with going after the company. In August 2019, US stocks were whipsawed repeatedly by his threats to sharply escalate a trade war with China, helping set off up-or-down moves of more than 1% in the S&P 500 during half of that month’s trading sessions. The spat also moved currency markets — one corner where hedge funds are active.
Even some investors with a longer-term, fundamentals-driven approach expect a political shakeup under Trump to create ways to profit.
“Trump noise sometimes creates opportunities,” Carol Lye, portfolio manager at Brandywine Global Investment Management in Singapore. She cited the slide in the Mexican peso in late 2016 as he pledged to build a border wall, before the currency rebounded the following year.
The US election campaign will likely draw more attention from Wall Street as Election Day gets closer and policy positions become a more prominent part of the contest.
Trump and Republicans have already made clear that they will push to renew sweeping tax cuts put in place in 2017 that are set to expire next year, though Biden and the Democrats have also indicated they want to extent at least some of them.
Trump is also expected to seek to more aggressively deport those working in the US illegally and has called for 60% tariffs on imports from China and 10% duties on those from the rest of the world. Both of those could put upward pressure on inflation, potentially resetting the market’s expectations for interest-rate cuts.
Some informal Trump advisers have floated ideas about possible changes to the Fed that would give him more power over the central bank, as well. While neither he nor the campaign has endorsed doing so, such a step would almost certainly roil the bond market by fanning worries that the bank would face politically motivated pressure to cut interest rates.
“You have to address the elephant in the room, that no matter what happens in the scenario that Trump wins — everything that he says will be amplified in North America and globally,” said George Boubouras, head of research at hedge fund K2 Asset Management Ltd. “We in markets love volatility — but we do try not to get too hung up on the amplified emotion that will come from a Trump presidency.”