Markets jittery as “Trump Trade’ roils bonds
Jitters in the financial markets are pushing down prices of bonds and shares this morning, and nudging up the cost of government borrowing.
In London, the FTSE 100 share index has droppped by 58 points, or 0.7%, to 8261 points, the lowest since last Wednesday. European markets are also in the red, with Spain’s IBEX and Italy’s FTSE MIB both down around 1%.
Wall Street is set for a lower open in three hours:
⚠️ U.S. STOCK INDEX FUTURES EXTEND DECLINES
**U.S. S&P 500 E-MINIS DOWN 0.53%, NASDAQ 100 E-MINIS DOWN 0.69%, DOW E-MINIS DOWN 0.5%
— PiQ (@PiQSuite) October 22, 2024
Bond yields (the rate of return) are rising, as bond prices fall, adding to losses yesterday.
This has pushed the yield on 10-year US Treasury bills up to 4.2%, the highest since late July.
UK gilt yields have risen to a one-week high.
With the US elections just two weeks away, the possibility of a Donald Trump win is moving markets, argues Stephen Innes, managing partner at SPI Asset Management, who says:
The “Trump Trade” is back in the driver’s seat, steering everything from bonds to the currency market, with election risks now gripping investor sentiment like never before.
The latest data from prediction platforms like Polymarket, Kalshi, and PredictIt now show Trump’s odds of reclaiming the Oval Office shooting past 60%, with talk of a Red Sweep gaining traction. And this isn’t just making headlines—it’s moving markets.
The dollar is getting a nice tailwind, rising against everything in its path, while Treasury yields, well, they’re doing their best to keep pace, pushing above 4.20% as the market tries to make sense of what a Trump 2.0 presidency could mean for policy shifts, fiscal spending, and inflation.
A Trump victory is likely to lead to a larger budget deficit, corporate tax cuts, and a friendlier regulatory environment, Innes adds. That could lead to faster growth but also lead to higher inflation and interest rates – with Trump also bringing further trade protectionism.
Kit Juckes, chief foreign exchange strategist at Société Générale, cites uncertainty over the US election, and concerns that interest rates may not be cut as quickly as expected, saying:
There was trouble in bond-land yesterday. US supply, political uncertainty, fear of extended fiscal accommodation and concern that the rate -cutting cycle will be shallower than expected sent US yields back to levels last seen in July.
Juckes adds that there is a clear contrast between a US economy fuelled by fiscal largesse (or fiscal irresponsibility?) and pressure for more austerity in Europe (including the UK).
Key events
Hat-tip to Deutsche Bank, who have calculated the annualised stock market returns for each US President back to Teddy Roosevelt in 1901.
They have calculated that 13 of the last 15 Presidents have presided over annualised returns of between 10% and 17%, and 7 of the last 9 have been in an even tighter 14-17% range.
So, while Donald Trump and Kamala Harris are presenting US voters with a stark choice, that decision may not have quite as much impact on the markets than on, say, society.
Deutsche Bank’s Jim Reid argues that it’s “better to be lucky than good”, meaning events are more likely than policy to dictate big-picture market performance under the next President:
The big outliers were driven by events that were arguably mostly outside of the control of the sitting President, namely the Depression, the 1973 oil shock, and the double whammy of the post-2000 bubble unwind and the early GFC shock of the George W. Bush administration.
Academics have argued that Hoover’s policies exacerbated the Depression, but you only have to look at the returns under Coolidge (the highest of any president) over 1923-29 to see that he likely presided over a bubble that contributed to the subsequent 1929 crash, even if he had left office earlier that year. So Hoover had a challenging legacy to deal with.
“The stock boom was blowing great guns when I came into the White House.”
-President Herbert Hoover— The 1929 Stock Market Crash (@stckmrktcrsh29) April 4, 2018
Mexico’s peso has also been hit by the ‘Trump trade’.
Yesterday, the peso fell to more than 20 to the US dollar, a six-week low, before recovering very slightly today to 19.9424 today.
Strategists at Danish investment bank Saxo say:
The Mexican person weakened to more than 20 pesos to the US dollar yesterday as the options market in peso suggest investors are very nervous about the impact on the peso if Trump should become president.
Euro could drop 10% under Trump tariffs and tax cuts, warns Goldman Sachs
A Trump win next month could be bad news for the euro, especially if Republicans pull off a clean sweep on Capitol Hill.
Goldman Sachs analysts have predicted today that the the euro could fall as much as 10% in a scenario in which Donald Trump imposes widespread tariffs and cuts domestic taxes after winning November’s election.
The euro is currently trading at $1.0827, so a 10% drop implies it would fall below parity against the dollar, as it last did two years ago.
European policymakers have been shaken by Trump’s proposal of a 10% tariff on all imported goods, which would hurt Europe’s exporters.
Trump has also been promising tax cuts, which would be potentially inflationary – leading to higher interest rates.
In a new research note, Goldman’s Michael Cahill writes:
Tariffs have a direct influence on exchange rates, so we expect that to be the focus for FX markets in different election scenarios.
More specifically, we expect the strongest Dollar response to come from a Republican sweep, which would open the door to larger tariff increases in combination with domestic tax cuts.
Cahill predicts a smaller dollar rally if the election results in a divided Republican government, adding:
A Democratic sweep or divided Democratic government would likely result in some initial Dollar downside as markets reprice the prospect of more dramatic changes in tariffs.
Bloomberg: Reeves considering Amazon tax to support high street
Next week’s UK budget is also influencing the pound.
If Rachel Reeves tightens public spending more than expected (despite protests from colleagues), then growth would be weaker… and the Bank of England more likely to lower interest rates.
There are reports today that the chancellor is considering increasing taxes paid by online giants such as Amazon.com Inc. That would help fund new support for the high street.
Bloomberg reports:
Britain’s finance minister is looking at ways to change the existing system of business rates — under which tax bills are based on the value of a firm’s physical premises — so that e-commerce companies such as Amazon pay more, according to people familiar with the matter, who requested anonymity discussing plans that haven’t been finalized.
She’s examining the move alongside a move to reduce bills on shops, leisure and hospitality, the people said.
The markets are likely to become more volatile as the US election approaches, predicts Mark Haefele, chief investment officer at UBS Global Wealth Management, as the polls have been tightening.
Haefele says:
“As neither party holds a clear advantage in any of the key swing states that could decide the outcome, the race remains too close for pollsters to call, and we expect volatility to pick up in the coming weeks amid elevated uncertainty.
But we also think the potential volatility is unlikely to derail positive equity fundamentals and remind investors not to make dramatic portfolio changes based on expected election outcomes.”
Pound lowest since late August amid dollar strength
The pound has dropped to a two-month low against the US dollar this morning.
Sterling traded as low as $1.2967 this morning, its lowest level since 19 August, as the so-called ‘Trump Trade’ ripples through markets.
Neil Wilson, analyst at Finalto, says:
Markets think that a Trump win is a) increasingly likely and b) going to be bad for bonds. Markets are also positioning for broad dollar strength – DXY’s rip higher corresponds to the surge in Trump’s odds.
Moreover, a Trump win ought to mean tighter Fed policy, or at least that is the thinking.
Expectations that UK interest rates will be cut several times in the months ahead have also weighed on the pound. A quarter-point rate cut in November is currently seen as a 98% chance.
Markets jittery as “Trump Trade’ roils bonds
Jitters in the financial markets are pushing down prices of bonds and shares this morning, and nudging up the cost of government borrowing.
In London, the FTSE 100 share index has droppped by 58 points, or 0.7%, to 8261 points, the lowest since last Wednesday. European markets are also in the red, with Spain’s IBEX and Italy’s FTSE MIB both down around 1%.
Wall Street is set for a lower open in three hours:
⚠️ U.S. STOCK INDEX FUTURES EXTEND DECLINES
**U.S. S&P 500 E-MINIS DOWN 0.53%, NASDAQ 100 E-MINIS DOWN 0.69%, DOW E-MINIS DOWN 0.5%
— PiQ (@PiQSuite) October 22, 2024
Bond yields (the rate of return) are rising, as bond prices fall, adding to losses yesterday.
This has pushed the yield on 10-year US Treasury bills up to 4.2%, the highest since late July.
UK gilt yields have risen to a one-week high.
With the US elections just two weeks away, the possibility of a Donald Trump win is moving markets, argues Stephen Innes, managing partner at SPI Asset Management, who says:
The “Trump Trade” is back in the driver’s seat, steering everything from bonds to the currency market, with election risks now gripping investor sentiment like never before.
The latest data from prediction platforms like Polymarket, Kalshi, and PredictIt now show Trump’s odds of reclaiming the Oval Office shooting past 60%, with talk of a Red Sweep gaining traction. And this isn’t just making headlines—it’s moving markets.
The dollar is getting a nice tailwind, rising against everything in its path, while Treasury yields, well, they’re doing their best to keep pace, pushing above 4.20% as the market tries to make sense of what a Trump 2.0 presidency could mean for policy shifts, fiscal spending, and inflation.
A Trump victory is likely to lead to a larger budget deficit, corporate tax cuts, and a friendlier regulatory environment, Innes adds. That could lead to faster growth but also lead to higher inflation and interest rates – with Trump also bringing further trade protectionism.
Kit Juckes, chief foreign exchange strategist at Société Générale, cites uncertainty over the US election, and concerns that interest rates may not be cut as quickly as expected, saying:
There was trouble in bond-land yesterday. US supply, political uncertainty, fear of extended fiscal accommodation and concern that the rate -cutting cycle will be shallower than expected sent US yields back to levels last seen in July.
Juckes adds that there is a clear contrast between a US economy fuelled by fiscal largesse (or fiscal irresponsibility?) and pressure for more austerity in Europe (including the UK).
NFU asks Starmer to stand by his commitments to British farmers
Britain’s farmers are urging the government not to hit them with inheritance tax on their agricultural land.
The National Farmers’ Union (NFU) has written a letter to Prime Minister Sir Keir Starmer calling on him to deliver a renewed agriculture budget and confirm the continuation of Agricultural Property Relief (APR).
They remind Keir Starmer that he told them in 2023 that rural communities were in his DNA, as he grew up in a rural community.
The NFU are concerned by reports that Rachel Reeves could target Agriculture Property Relief (APR), which allows land or pasture that is used to grow crops or to rear animals to be free of inheritance tax, in the budget.
NFU President Tom Bradshaw says that reports that the government is considering cutting the agriculture budget, and possibly reviewing APR are incredibly concerning.
“We are asking for a renewed multi-year annual agriculture budget of £5.6bn, not because it would be nice to have, but because it is an essential investment to deliver the government’s environmental goals, increase growth and support the economic stability of farm businesses.
The loss of APR could mean family farms, who are vital to producing food for the country, providing jobs and looking after our countryside, having to be sold to cover the costs. Changes would amount to a “Family Farm Tax”. It would also have a devastating impact on tenant farmers and new entrants.
Motoring and cycling retailer Halfords has warned that UK consumers are wary of making big ticket, discretionary purchases, after reporting no sales growth in the last six months.
Halfords told the City that its like-for like sales dipped by 0.1% in the six months to 27th September, following “the UK’s wettest spring since 1986”.
And looking ahead, Halfords cautions that the short-term outlook remains “uncertain”, despite pockets of improving consumer sentiment.
Graham Stapleton, chief executive officer of Halfords, commented:
“While consumers remain cautious in their discretionary spending compounded by uncertainty around the contents of the upcoming Autumn Budget, we have continued to focus on controlling the controllables and I am pleased with our performance in the first half of FY25.
Investec: OBR’s deficit forecast ‘looks unachievable’
There is a small glimmer of good news amid the gloom in this morning’s public finances for the chancellor.
The ONS has cut its estimate of public sector net borrowing in the first five months of the financial year by £1.1 billion to £63.0bn.
That, though, didn’t prevent borrowing running at £6.7bn above the forecast from the fiscal watchdog (the Office for Budget Responsibility).
Philip Shaw of Investec told clients:
Although the latest set of data represents a relative positive surprise, it does not shift the dial on the wider fiscal picture. At the halfway point in the financial year, borrowing is tracking some £1.1bn per month above the OBR’s projections in March and although the deficit is on course to undershoot last year’s £121.9bn, its forecast of £87.2bn for this year looks unachievable.
Moreover it will certainly not alter the stance of the forthcoming Budget on Wednesday next week when Chancellor Rachel Reeves is set to unveil higher taxes. Our Budget and Spending Review preview will be published later this week.
Over in Berlin, Chancellor Olaf Scholz has declared that Germany has been hit harder than other world economies by economic headwinds and high interest rates.
Scholz is pledging to work with industry to revive growth, telling a conference of the BDA employers’ association.
“Inflation, rising interest rates, geopolitical conflicts, strained supply chains – as an industrialised and export-oriented country, we have been hit harder than others.”
Scholz said his government’s efforts to reduce bureaucracy, strengthen investment and create affordable, sustainable energy would lift growth, adding that Germany also needs more skilled workers.
⚠️ GERMAN CHANCELLOR SCHOLZ: WE NEED MORE GROWTH
— PiQ (@PiQSuite) October 22, 2024
Inheritance tax receipts rise
Inheritance Tax has brought £4.3bn into the government’s coffers since April, which is £400m more than in the same period in the previous financial year, new data from HMRC shows.
Rachel Reeves may attempt to raise more from IHT, which raised almost £7.5bn in the last financial year, in the budget.
Nicholas Hyett, investment manager at Wealth Club, says:
“Inheritance tax is an absolute cash cow for His Majesty’s Revenue and Customs, which is why it remains in the spotlight ahead of next weeks’ Autumn Budget. No one knows what changes will be announced, but most agree there will be some attempt to milk more revenue from estates.
The great thing about inheritance tax from the government’s point of view is that it’s complicated, with a whole host of rules that could be tweaked to boost the tax take. Tweaks could include changes to Business Relief, including on AIM shares, making pensions subject to inheritance tax and extending the time period needed to make gifts inheritance tax free.
Labour MP Torsten Bell says the rise in borrowing in September is due to the mismanagement of the economy by the previous government:
This means borrowing so far this year is over £6bn higher than the £73bn forecast in March by @OBR_UK – because the Tories had given up trying to set realistic budgets or to manage them once set. They might have been in government but gave up on governing long before the election https://t.co/2AnY1cTK6K
— Torsten Bell (@TorstenBell) October 22, 2024
The disgrace of what was happening in the asylum system is the most obvious example, but so was ignoring public sector pay rises to even partially keep pace with the private sector in a higher inflation phase. Or for that matter bothering to run our prisons at all responsibly
— Torsten Bell (@TorstenBell) October 22, 2024
Liberal Democrat Treasury spokeswoman Daisy Cooper says:
“Today’s figures highlight the difficult position of our public finances after years of mismanagement under the previous Conservative government – but this can’t be an excuse for the Chancellor to make the wrong decisions at the Budget.
“We need to see urgent investment in our NHS and public services which have been reduced to their knees and bold action to fix our crumbling schools and hospitals.
“The burden of fixing the Conservatives’ mess mustn’t fall on hard working households, but on the big banks, social media companies and oil and gas giants that can afford to pay a small amount of their soaring profits to get our public services back on their feet.”
Alex Kerr, UK economist at Capital Economics, says:
While it is too late for September’s disappointing public finances figures to influence the amount of headroom the OBR will hand the Chancellor in the Budget on 30th October, they do highlight the limited scope the Chancellor has to increase day-to-day spending without raising taxes.
That said, if she tweaks her fiscal rules, she will still have room to raise public investment.
Cross-party MPs urge Reeves to impose 2% tax on wealth above £10m
Larry Elliott
A group of MPs are urging Rachel Reeves to impose a wealth tax on Britain’s rich in next week’s budget rather than announce spending cuts that would hit the most poor hardest.
In a letter to the chancellor, the MPs – including the former Labour leader Jeremy Corbyn and his then shadow chancellor, John McDonnell – say she could raise £24bn a year from a 2% tax on wealth above £10m and lay the foundations for a fairer, more sustainable economy.
The letter, organised by the campaign group Green New Deal Rising, says in contrast to the general trend, taxes on the very richest are only slightly more onerous than they were in the mid-1960s.
“This is deeply unfair and immoral: in an age of climate and economic crises, where public funds are desperately needed, it is necessary that we redress this imbalance. The transformative potential of taxes on extreme wealth is clear, and appetite for them is growing.”
Resolution Foundation: Public finances highlight the challenges facing the chancellor
Cara Pacitti, senior economist at the Resolution Foundation, says:
“Six months into the financial year, Britain is borrowing £6.7bn more than expected at the time of the Budget in March. This reflects central government spending which is £11.5bn higher than anticipated, largely due to public sector pay rises and higher running costs.
“Today’s data highlights the scale of the public finances challenges facing the Chancellor as she grapples with overspending today, the need to avoid austerity in the future, and having to fund extra public service spending through tax rises.”
Public sector borrowing was £16.6bn in September – £2.1bn higher than this time last year, and the 3rd highest borrowing for September on record after the pandemic years (in nominal terms). pic.twitter.com/awAPrTiPal
— Cara Pacitti (@carapacitti) October 22, 2024
The Resolution Foundation explain that this morning’s data shows that central government spending is already £11.5bn above the OBR’s March forecast
Most of that comes from spending on good and services, typical higher pay and running costs, which they say “tallies with the £22 billion ‘black hole’ identified by the Treasury back in July.”
