Morning Brief: Trump's impact steepens curve; China's economy falters
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The Day Ahead in U.S. and Global Markets
The shocking event on Saturday, where former President Donald Trump was shot while campaigning for re-election, is having significant ramifications on global markets. Although Trump sustained only a minor injury and continued on to the Republican convention in Milwaukee, the incident is creating waves across financial markets, primarily due to the perception that it boosts his chances of winning the upcoming November election.
Financial analysts believe this incident increases the probability of another Trump administration, which would likely result in extended tax cuts and increased trade tariffs. These measures are expected to lead to higher U.S. fiscal deficits amid potential economic challenges and pressure on the Federal Reserve to ease monetary policy, despite subsiding inflation in the near term. Additionally, there is speculation that the U.S. might reduce its support for Ukraine, shifting more of the fiscal responsibility onto Europe.
U.S. equities are anticipated to benefit from the potential tariffs, tax cuts, and a boost in domestic manufacturing. Consequently, stock futures rose, and betting markets have adjusted, placing Trump’s re-election chances close to 70%. The 2-to-30-year Treasury yield curve briefly turned positive, and the yield spread between two and ten-year bonds reduced to its narrowest margin since January, reflecting the market's reaction to the incident.
Another notable market response was Bitcoin, which surged past $60,000 for the first time in several weeks. Trump Media & Technology Group experienced a significant jump, surging 63% to $50.3.
Currency markets showed mixed responses, largely influenced by recent interventions and market closures in Japan. The dollar index remained stable, and although there were initial gains against the Mexican peso and the Chinese yuan, these were trimmed ahead of market openings as speculation about Fed rate cuts increased. The euro and sterling maintained strong positions, while currency market volatility diminished, with the euro/dollar exchange rate's implied volatility hitting lows not seen since 2021.
In China, the markets had a mixed reaction to disappointing economic data. Second-quarter GDP growth fell to 4.7%, missing the 5% forecast. Retail sales and ongoing declines in house prices were particularly concerning. Despite this, mainland Chinese stocks saw minor gains, driven by hopes for substantial government support amidst a ‘third plenum’ of the ruling Communist Party, which might introduce significant fiscal reforms.
On Wall Street, the earnings season progresses with Goldman Sachs and BlackRock set to report after other big banks' underwhelming performances. Google parent Alphabet is in advanced talks to acquire cybersecurity startup Wiz for approximately $23 billion, marking its largest acquisition to date.
