Macroscope | Why do investors refuse to take threat of second Trump term seriously?

Former US president Donald Trump looked eminently electable long before he became the target of an assassination attempt on July 13. His stock now appears to be even stronger as he prepares for the final stretch of a presidential race that is deepening bitter divisions in US society and is bound to deliver more surprises before election day on November 5.

In prediction markets, where punters bet on the outcomes of particular events, Trump appears to be the favourite to win the election. According to the PredictIt spread betting site, the odds of a Trump victory have risen to 65 per cent, up from 60 per cent before the assassination attempt. US President Joe Biden’s chances, meanwhile, currently stand at 20 per cent, which is down from 48 per cent before the first presidential debate on June 27.

Financial markets, which largely ignored the election in the first half of this year, are starting to be swayed by the prospect of a second Trump term. Since the debate, a so-called Trump trade – bets on assets that are sensitive to expectations of deregulation, tax cuts, higher trade tariffs and a crackdown on immigration – has begun to take hold.

The clearest sign of this is in US bond markets. The slope of the yield curve has started to steepen as long-term yields rise relative to short-term ones. With the US Federal Reserve widely expected to begin cutting interest rates in September, yields on short-dated bonds continue to fall. However, a second Trump term would ignite inflation because of a combination of even looser fiscal policy, more punitive tariffs and draconian tactics to curb migration. This is putting upward pressure on long-term yields.

Other signs investors are beginning to position for Trump’s return to the White House are the rally in the US dollar – which would benefit from expectations of a resumption of monetary tightening – and a surge in energy and private prison stocks that have been given a fillip from Trump’s pro-drilling stance and anti-immigration platform.