【MACRO Alert】 Political Violence Shakes the Dollar and Financial Markets!

This attack may bring greater momentum to Trump's political campaign. Since Biden's poor performance in the debate last month, the market has expected that the Republican Party's return to the White House will bring about policies of tax cuts, increased tariffs, and deregulation. These expectations have already triggered a series of investment behaviors. For example, if loose fiscal policy leads to a continuous rise in bond yields, the dollar may strengthen accordingly. In addition, Bitcoin rose above 60,000 US dollars after Trump was stabbed, which may reflect Trump's friendly stance towards cryptocurrencies.

Mark McCormick, the head of Toronto-Dominion Bank, said that this news has reinforced the view that Trump is the frontrunner and is optimistic about the trend of the dollar in the second half of the year and early 2025. However, the emergence of political violence may deepen people's concerns about the instability of the United States, prompting investors to turn to safe-haven assets, which may cover up some market positioning that has already emerged before the election.U.S. Treasury bonds may rise as investors seek safety, which may distort the Trump trade in the bond market. This trade relies on the bet that the yield curve will steepen because people expect Trump's fiscal and trade policies to increase inflationary pressure.

Priya Misra, a portfolio manager at J.P. Morgan Investment Management, pointed out that political risk is binary and difficult to avoid, and due to the fierceness of the campaign, the uncertainty is very high, which increases market volatility. This means that investors may seek temporary safety in defensive stocks such as large-cap companies. She also mentioned that this provides support for stocks that perform well when the yield curve steepens, especially financial stocks.

Michael Purves wrote in an email that if the market believes that Trump's chances of winning are higher than last Friday, then the back end of the bond market is expected to be sold off. He believes that although bond traders have always thought that there will be at least two rate cuts in 2024, the sharp rise in Trump's chances of being elected may prompt the Federal Reserve to stay on hold for a longer period. This incident marks a turning point in American political norms. After the shooting, he saw customer funds flowing into Bitcoin and gold. He pointed out that for the market, this means a safe-haven trade, but more towards non-traditional safe havens.

Strategists expect the election to be full of variables, especially because Democrats are still troubled by Biden's candidacy. Investors have also been trying to deal with the possibility that the election may end in a protracted dispute or political violence. Historically, similar incidents such as Reagan's shooting, the U.S. stock market fell before the early closing, but the S&P 500 index rose by more than 1% the next day, and the benchmark 10-year Treasury bond yield fell.

We can almost foresee that the currency will be the first major market in Asia to respond to the weekend shooting incident on Monday. There may be additional fluctuations, and liquidity will be affected due to the Japanese market holiday. It is expected that the dollar will open strong across the board, which is the role of the initial reflexive risk response and the view that Trump's poll support will rise. Bond investors should pay special attention because this attack is likely to increase Trump's chances of being elected and ultimately lead to concerns about the fiscal outlook. The bond market should realize at some point that Trump's chances of winning the White House are higher than any of his competitors.

Other market participants on Wall Street also expressed their views on the potential impact of the incident. It may be wisest for stock investors not to react, as the market will find its balance and return to the most important things such as economic growth, currency and fiscal policy, and corporate earnings. As Trump's chances of winning seem to be increasing, volatility will also increase. Mark Sobel, former U.S. Treasury economist and chairman of OMFIF America, expressed his views on the impact of Trump's re-election on the global dominance of the dollar!

He believes that if Trump is re-elected, it may threaten the status of the dollar as the world's main reserve currency. Although Trump has promised to maintain the global dominance of the dollar in the presidential campaign platform published by the Republican National Committee, Sobel pointed out in his paper that Trump's potential second term may weaken this position. He emphasized that the threat to the dollar will not come from the outside, but may come from a serious deterioration in the economic and financial conditions of the United States.

He pointed out that under Trump's leadership, fiscal soundness may not be guaranteed. Because of Trump's fiscal policies, including promised large-scale tax cuts and not cutting social security or medical insurance, as well as implementing universal tariffs, it may lead to inflation, thereby putting pressure on the stability of the dollar. In addition, the Trump administration's large-scale immigration restriction plan is expected to slow down the economic growth of the United States, further putting pressure on the stability of the dollar.

He also pointed out that if geopolitical tensions continue to escalate, the reserve status of the dollar may decrease, which seems very likely under the leadership of the Trump government. It should be known that during Trump's first term, the frequent use of sanctions has raised doubts about the United States as a reliable partner, which is usually a key reason for other countries to seek de-dollarization. He emphasized that actual policies and actions are more convincing than slogans, which means that Trump's actual policies may be contrary to the goal of maintaining the global dominance of the dollar that he wants to maintain.