Treasuries Get Hit as US Election Risks in Focus: Markets Wrap

(Bloomberg) — The world’s biggest bond market got hit as traders weighed the potential economic implications of the November US election after last week’s presidential debate between Joe Biden and Donald Trump.

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While many traders say it’s probably too early to start positioning or reading too much into election headlines, Wall Street kept a watchful eye on news regarding the presidential race. Just as it happened on Friday, Treasuries fell — with longer-term maturities largely underperforming shorter ones. Stocks edged mildly higher amid a rally in tech megacaps. The dollar rose.

Bloomberg News reported the Democratic National Committee is considering formally nominating Biden as early as mid-July to ensure he’s on November ballots. And a divided Supreme Court ruled that Trump has some immunity from criminal charges for trying to reverse the 2020 election results, all but ensuring that a trial won’t happen before the November election.

Investors are now looking toward the US election as an even bigger potential market event given that it currently appears Trump’s chances of retaking the White House have meaningfully improved, according to Ian Lyngen and Vail Hartman at BMO Capital Markets.

“During last week’s presidential debate, neither candidate proposed policies that would reduce the country’s fiscal deficit, which is growing unsustainable,” said Jose Torres at Interactive Brokers. “Meanwhile, the US political landscape is highly uncertain as members of the media and various Democrats call for Biden to step down from the race for the White House following his weak debate performance.”

Treasury 10-year yields approached 4.5%. The S&P 500 rose to around 5,475. Tesla Inc. jumped about 6%. Chewy Inc. whipsawed as Keith Gill — known as “Roaring Kitty” — disclosed a passive stake in the online pet product retailer. Gill was sued for allegedly orchestrating a “pump and dump” scheme involving GameStop Corp. shares.

The euro climbed as French election results suggested there’s a smaller probability of extreme policies coming from the far-right.

Following last week’s presidential debate that has shifted the probabilities of Trump winning over Biden, Morgan Stanley strategists Matthew Hornbach and Guneet Dhingra are re-evaluating their assumptions going into the elections.

“The key issue is the market now has to contend with rising probabilities of changes in immigration and tariff policies in an economy where growth has already been cooling, making the market more likely to price more rate cuts,” they wrote. “On the other hand, higher prospects of a Republican sweep, amid growing focus on deficits, could put upward pressure on long-end term premiums.”

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“While the rates market may still trade increased risks of a Republican victory with a steepening bias for now, we see scope for the focus to shift towards risks arising from trade policy (where differentiation across outcomes is likely to be greater) as the election nears,” said George Cole at Goldman Sachs Group Inc.

While there’s a common debate about whether the timing of the election impacts the Federal Reserve’s policy choices, history shows the US central bank has not refrained from taking action during those years, according to Komson Silapachai at Sage Advisory.

Since the 1950s, the Fed has changed its policy rate in every presidential election year, with the exception being 2012, when interest rates were already at zero, Silapachai noted. Even during the second half of presidential election years, in the thick of campaign season, the Fed hasn’t shied away from shifting policy as economic and financial conditions warrant.

“The Fed will be guided by economic data, not political pressure, sticking to its main goals of managing inflation and unemployment,” Silapachai added.

The dollar should stay elevated in the second half of the year as a result of improving Treasury yield advantage, decent US growth strength and November election risks, JPMorgan Chase & Co. strategists led by Meera Chandan wrote.

Growth-supportive fiscal policies should also be dollar-positive in near term, despite deficit implications in the medium term, they noted.

Meantime, Morgan Stanley equity strategists led by Michael Wilson say investors “should stay selective” and maintain a bias toward quality US stocks heading into election season. Those companies have more stable earnings, stronger balance sheets and higher margins.

“Risks are skewed to the downside for growth under Republican win scenarios due in part to immigration reform and tariffs,” they wrote. With inflation and fiscal sustainability also in focus, such dynamics “are likely headwinds to lower quality, cyclical areas of the market and small caps in this scenario.”

Corporate America faces the highest earnings bar in almost three years as it prepares to report second-quarter results, according to Goldman Sachs Group Inc. strategists led by David Kostin.

“The magnitude of earnings-per-share beats is likely to diminish as consensus forecasts set a higher bar than in previous quarters,” Kostin said. “We expect the outperformance ‘reward’ for stocks beating estimates will be smaller than average again this quarter.”

Corporate Highlights:

Teva Pharmaceutical Industries Ltd. is being investigated by the US Federal Trade Commission over patents for certain drugs including asthma inhalers, according to a person familiar with the matter.
Boeing Co. agreed to buy back Spirit AeroSystems Holdings Inc. for $37.25 a share in an all-stock deal that values the supplier at $4.7 billion, unwinding a two-decade separation as the embattled US planemaker tries to fix its manufacturing defects.
French antitrust enforcers are preparing to charge Nvidia Corp. with allegedly anticompetitive practices, Reuters reported, as the world’s most valuable chipmaker faces mounting regulatory scrutiny.
Meta Platforms Inc. has been slapped with a warning over its subscription model for ad-free services on Instagram and Facebook, risking potentially heavy fines in the European Union’s latest attack on Big Tech under tough new rules.
SVB Financial Group secured a more than $600 million cut to its potential tax bill, boosting some bonds tied to the bankrupt former parent of Silicon Valley Bank and removing an obstacle in its path to repaying creditors in Chapter 11.

Key events this week:

Eurozone CPI, unemployment, Tuesday
US job openings, Tuesday
Jerome Powell and Christine Lagarde speak at ECB forum in Portugal, Tuesday
China Caixin services PMI, Wednesday
Eurozone S&P Global Eurozone Services PMI, PPI, Wednesday
US Fed minutes, ADP employment, ISM Services, factory orders, initial jobless claims, durable goods, Wednesday
Fed’s John Williams speaks, Wednesday
UK general election, Thursday
US Independence Day holiday, Thursday
Eurozone retail sales, Friday
US jobs report, Friday
Fed’s John Williams speaks, Friday

Some of the main moves in markets:

Stocks

The S&P 500 rose 0.3% as of 4 p.m. New York time
The Nasdaq 100 rose 0.7%
The Dow Jones Industrial Average rose 0.1%
The MSCI World Index rose 0.3%

Currencies

The Bloomberg Dollar Spot Index rose 0.1%
The euro rose 0.2% to $1.0739
The British pound was little changed at $1.2643
The Japanese yen fell 0.4% to 161.46 per dollar

Cryptocurrencies

Bitcoin rose 2% to $63,114
Ether rose 1.5% to $3,467.71

Bonds

The yield on 10-year Treasuries advanced eight basis points to 4.48%
Germany’s 10-year yield advanced 11 basis points to 2.61%
Britain’s 10-year yield advanced 11 basis points to 4.28%

Commodities

West Texas Intermediate crude rose 2.4% to $83.48 a barrel
Spot gold rose 0.2% to $2,331.72 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Vildana Hajric, Sagarika Jaisinghani, Masaki Kondo, Felice Maranz, Lynn Thomasson, Julien Ponthus, John Viljoen, Catherine Bosley and Matthew Burgess.