Trump trade in full swing

We’re on the cusp of the US election results. They’re starting to trickle in, pointing toward a more favourable outcome for the Republicans and Donald Trump. As a result, the so-called ‘Trump trade’ is in full swing this morning.

The US yields are pushing higher on expectation of further debt ballooning under a Donald Trump presidency. Bitcoin hit a fresh record. In the traditional currency markets, the US dollar is rallying against most majors this morning. The euro – which is one of the most vulnerable major currencies to Trump presidency due to the tariff threat – tanked to 1.0718 against the greenback. Mexican peso – which is another currency highly vulnerable to a Trump win – is down by 3%. The Chinese yuan is weaker. Cable slipped below 1.29, the USDJPY extended gains to the highest levels since summer and even the safe-haven assets like Swiss franc and gold are weaker this morning against a broadly stronger US dollar.

In equities, the divergence is clear. The major US index futures are in the positive territory, with the Dow Jones futures leading gains. FTSE futures are flat, whereas the DAX and Eurostoxx futures are clearly not smiling. Bloomberg Economics tried to put numbers on the damage that Trump tariffs would cause to the world and the numbers are scary. China’s exports to the US could melt by more than 80%, according to them, assuming a 60% tariffs relative to the baseline of no new tariffs. Australian exports to the US could melt by more than 50%, the British and EU exports could tank by more than 40%. And these numbers would be worse if the trade partners decide to retaliate.

Elsewhere

Yesterday’s data showed that the French industrial production fell more sharply than expected in September, while activity in Britain expanded stronger-than-expected, but that the 10-yer gilt auction didn’t go well. The 10-year gilt yield extended its advance to the highest levels in a year, as a rising warning that the British government’s plans to boost growth by boosting spending won’t come cheap. Deterioration in Britain’s growth outlook is negative for sterling. But the fact that the Bank of England (BoE) will remain careful when easing policy could limit sterling’s downside potential – if the growth prospects don’t worsen significantly.

Chips under Trump

Palantir rallied more than 23% to an ATH yesterday, after the company announced a record profit on AI demand and raised its earnings forecast. Nvidia jumped 3% on AI-positive news, and Invesco’s semiconductor ETF gained 2.80%.

One relevant question is: what will happen to semiconductors under Trump?

The Chips Act that has been brought on the table during the Biden administration is a bipartisan act. Therefore, the present incentives should remain unchanged under Trump. Tax cuts and increased defense spending could be additional positive factors for the US chipmakers. But on the other hand, worsening trade relations and escalation of chip war with China could dampen the chipmakers’ sales and profits.

Earnings and Oil

Saudi’s Aramco is the last oil giant reporting weak earnings last quarter. Aramco’s profit shrank by 15% in Q3 compared to a year ago - due to weak oil prices – but the company kept its monstruous dividend of $31 billion unchanged, because the Saudi government owns nearly all Aramco and needs this money to fund its projects. As such, Aramco has to borrow money to pay dividends to the Saudi government at the moment.

You see where I am going, right?

Oil prices have been on a falling trend since a while now. The weak global economy and sluggish Chinese demand, combined with the green transition have taken a toll on global oil demand prospects, while OPEC’s production cuts have been countered by increased production elsewhere. The US for example is pumping like there is no tomorrow (and Trump vows to keep it that way). Under these circumstances, Saudi, which is the backbone of the OPEC policy, will be incresingly tempted to give up on the production cut strategy and adopt a market share focus to increase its revenue by selling more oil with cheap prices. That, to me, could weaken the OPEC-encouraged oil bulls’ hands in the medium run. The barrel of US crude is back below the 50-DMA and preparing to test the $70pb support to the downside, yet again.