Please see below today’s Daily Investment Bulletin from Brooks Macdonald, which was received this morning, 16/07/2024:
What has happened
Politics dominated most of the session yesterday with markets trying to price potential Trump presidential trades. The focus in the bond market was on the changing Treasury yield curve, which saw the gap between the 2-year and 10-year Treasury yields compress to approximately 22 basis points, the smallest inversion since January. This movement was attributed to the anticipation that Trump’s proposed policies on taxes, trade tariffs, and immigration could lead to inflationary pressures and a bearish steepening trend. In the stock market, there was a noticeable shift towards companies likely to gain from Trump’s policy agenda, with the broader market finishing just shy of the previous week’s peak by less than 0.1%. Meanwhile, the Russell 2000 index, which tracks small-cap stocks, climbed 1.8%, reaching its highest point in over two and a half years.
Pricing in a Trump win?
Sectors such as banking and the oil and gas industry are perceived as likely beneficiaries in the event of a Trump victory, owing to his inclination towards deregulation and their limited vulnerability to potential tariffs. While the anticipation of Trump’s presidency buoyed many assets, it also highlighted vulnerabilities in certain areas. Notably, solar energy companies experienced declines, as the sentiment suggested they would have been more advantaged under a Democratic leadership. This was reflected in significant drops for companies like Sunrun, which fell by 8.95%, and SolarEdge Technologies, which saw a 15.36% decrease.
Powell confirms a more dovish stance
Speaking at the Economic Club of Washington, Federal Reserve Chairman Powell expressed increased confidence that inflation is on track to meet the target, based on Q2 data. However, Powell refrained from hinting at any upcoming policy decisions. He also noted a slowdown in the labour market. With the latest Fedspeak mostly in line with other recent commentary, market pricing for a July cut remains below 10%, though the odds of a September cut close to 100% and the year-end median fed funds rate of 4.80% represents 57 bp of cuts from the current midpoint.
What does Brooks Macdonald think
Yesterday also marked President Trump’s announcement of J.D. Vance, the Ohio Senator, as his vice-presidential candidate. At the age of 39, Vance stands as one of the youngest senators in the current assembly. Typically, a presidential hopeful selects a vice-presidential partner to attract a broader voter base or to balance out perceived shortcomings in image or policy areas. However, Trump has chosen a young loyal Make America Great Again (MAGA) supporter. Equity markets will try to price in the impact of a Trump victory and a potential return of extreme MAGA agenda. Investor could see rising volatility in specific sectors in coming months, though disinflation momentum and Fed pivot could somewhat mute the impact.
Bloomberg as at 16/07/2024. TR denotes Net Total Return.
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Charlotte Clarke
16/07/2024