Biden’s withdrawal calms bond market, dampens “Trump trade”
Compared to the best way US President Joe Biden’s decision to not run for a second term rocked the political world, markets seemed – not less than on the surface – baffled.
Biden’s reversal took a few of the wind out of the “Trump trade” within the stock, bond and cryptocurrency markets. Stock markets overall recovered the day after the announcement, led by large-cap technology stocks. However, oil and gas stocks and cryptocurrencies – which were expected to fare higher under a Donald Trump administration – fell.
The Republican candidate is seen as someone who will spend more on the national debt than another candidate the Democrats could select. As such, a Trump/Vance administration is anticipated to bring about higher inflation. This has recently been reflected in a steeper bond yield curve as polls put him ahead of Biden. However, this expectation of Trump being a protected candidate has since been dashed, and bond yields have flattened somewhat.
Kristina Hooper, Chief Strategist for Global Markets at Invescowarned investors to brace for shorter-term volatility “as the significant uncertainty surrounding the new Democratic slate of candidates may not resolve until the party’s convention in August.” She also suggested that investors should keep a better eye on the Federal Reserve’s rate of interest moves. (See below for more on Canada’s recent rate cut.)
A reason for Canadians and investors to think: As Senator, Vice President and Democratic frontrunner Kamala Harris voted against the trade agreement between the United States, Canada and Mexico (USMCA), the successor to the North American Free Trade Agreement (NAFTA) concluded by the Trump administration in 2020. At the time, she cited the dearth of environmental protection as the explanation for her decision.
Bank of Canada cuts rates of interest again
Speaking of monetary policy, on Wednesday, Bank of Canada (BoC) Governor Tiff Macklem announced a second quarter-percentage-point rate of interest cut in as many months, bringing the overnight rate all the way down to 4.5%. In addition, Macklem hinted that there might be more cuts this 12 months, assuming inflation continues to fall toward the bank’s 2% goal. The country’s consumer price index (CPI) rose 2.7% year-on-year in June, a decline from its Twenty first-century high of 8.1% two years earlier.
The rate of interest cut was widely expected by the markets.
“Today’s decision to cut was in line with our assessment and the broader market consensus, which had increased the likelihood of a cut following a flood of new data showing easing inflation, weakness in the labor market and a weakening economy.”
– Brian Yu, AVP and Chief Economist at Central1 Credit Union.
The BoC is forecasting GDP growth of 1.2% this 12 months, 2.1% in 2025 and a couple of.4% in 2026, which sounds OK until you concentrate on that population growth is currently at 3%. Regardless, the speed cut offers some relief to mortgage holders and supports bond markets.
