Biden's withdrawal softens bond market, lowers “Trump trade”
Compared to the way US President Joe Biden's decision not to run for a second term rocked the political world, the markets seemed out of money—on the surface, at least.
Biden's U-turn has taken the wind out of the “Trump trade” in the stock, bond and cryptocurrency markets. Stock markets as a whole rebounded the day after the announcement, with mega-cap technology stocks leading the way. But oil and gas stocks and cryptocurrencies—which were expected to improve under Donald Trump's administration—were hammered.
The Republican nominee is seen as a bigger deficit spender than anyone the Democrats might settle on, so a Trump/Vance administration is expected to usher in higher inflation. That just translated into a rising bond yield curve as polls showed him ahead of Biden. However, expectations of Trump as an inevitable shoo-in have now waned and bond yields have been flat.
However, Kristina Hooper, chief global market strategist at Invesco, warned investors to remain on the lookout for short-term volatility, “as the great uncertainty about the new Democratic ticket may not be resolved until the caucuses in August.” He also suggested that investors should pay close attention to the US Federal Reserve's moves in relation to interest rates. (More on Canada's recent rate cuts below.)
Something Canadians and investors should consider: As a member of parliament, Vice President and Democratic front runner Kamala Harris voted against the US-Canada-Mexico trade agreement (USMCA), the successor to NAFTA (North American Free Trade Agreement) that was concluded by. Trump administration in 2020. At the time, he pointed out the lack of environmental protection in his decision.
The Bank of Canada is cutting rates again
Speaking of monetary policy, on Wednesday Bank of Canada (BoC) governor Tiff Macklem announced the second quarter point cut in interest rates in as many months, bringing the overnight lending rate down to 4.5%. In addition, Macklem revealed that there will be more cuts to come this year; provided inflation continues to fall to the Bank's target of 2%. The country's Consumer Price Index (CPI) rose 2.7% year-on-year in June, down from a 21st century high of 8.1% two years ago.
The rate cut was widely expected by markets.
“Today's decision to cut was in line with our request, as well as a broader market consensus that increased the likelihood of tapering following a flurry of recent data showing inflation, a slowing labor market and a sluggish economy.”
– Brian Yu, AVP and chief economist for Central1 Credit Union.
The BoC is forecasting GDP growth of 1.2% this year, 2.1% in 2025 and 2.4% in 2026, which sounds OK until you consider that population growth is currently running at 3%. However, the rate cut provides some relief for mortgage holders and support for bond markets.
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