The “Trump Trade”, “Blue Trade” and … Gold rate?
There have been some major shake ups in the US election over the last couple of weeks, and they haven’t gone unnoticed by the markets. The major news events are seen having an effect on equities, commodities and even the dollar. This has led to the rise of the term “Trump trade”, and the competing “blue trade”, as investors try to pre-position ahead of the results in November. How could this affect currency markets going forward? And is there a clear winner?
Before mid-July, markets were deliberating in what was generally thought to be a continuation of the status quo if Joe Biden won another term, and a change in policy if Trump won. With polls showing favoritism towards either within the margin of error, the market was biding its time to see how things unfolded. There are still a few months before the election.
What Does a Trump Trade Mean
The attempted assassination on candidate Trump caused an important shift in expectations, and brought the possibility of a Trump trade back to the fore. Trump was already seen taking the lead in the polls following Biden’s disastrous performance in the first debate. With the former President taking a noticeable lead, it was time to figure out what that would mean for the markets when new policies were implemented.
The consensus seems to be that a Trump administration would be good for small cap, domestically focused stocks, and the dollar. Analysts point to Trump’s promise of tariffs and emphasis on cutting taxes. This is seen as likely leading to higher deficits, and keeping interest rates higher under his administration. Higher interest rates would translate into a stronger dollar, and presumably be not so good for gold rate. On on the other hand, Trump’s notorious uncertainty could still leave investors favoring the yellow metal as they might want to stay closer to a safe haven.
What About the Harris Trade?
With President Biden stepping out of the race, the “blue” team has chosen Vice President Kamala Harris to lead the ticket. Polling conducted before the changeover suggested that Harris had slightly better results than her current boss, implying that the chances for Trump to win in November are lower. The blue (or Harris) trade has its moment to shine.
While a Harris administration would likely have many similarities to the current White House, a new President would likely imply some different priorities. However, in the main, the market seems to believe that the focus will continue to be on tech, with an emphasis on raising taxes. That would likely imply the Fed would keep cutting interest rates, and the lack of tariffs would keep inflation from rising as much. Those lower interest rates would be seen helping the price of gold.
Taxes: The Big Deal
The main difference between the two potential administrations as far as governments are concerned could be the expiration of the Trump tax cuts scheduled for next year. Obviously Trump wants to keep them in place, but Harris wants them to expire. Letting them lapse would imply higher government revenue, lowering the deficit. But also likely weighing on economic growth. Both factors would contribute to the Fed lowering rates at a faster rate than currently.
Lower interest rates and a slower economy would also weaken the dollar, giving a double boost for gold rate next year. Assuming the new administration doesn’t take other actions – such as increasing spending – to counteract the situation.