What does Biden’s exit mean for views on the economy?

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U.S. President Joe Biden’s exit from Sunday’s presidential election may deter investors from betting that a Republican victory will increase U.S. fiscal and inflationary pressures, while some analysts said markets could benefit from the increased prospect of a divided government under the next administration.

it will be called so Trump-tradeIt sees the former president’s tax policies as boosting corporate profits while undermining the nation’s long-term budget health, following Biden’s disastrous televised debate last month.

This was particularly visible in US government bonds, with long-dated Treasury yields – which move inversely to prices – rising briefly on heightened expectations that Republican presidential candidate Donald Trump will debate and retake the White House late last week. Attempted assassination.

The move reflected investors’ confidence in the lead-up to a Trump presidency, even as yields retreated quickly amid signs of economic weakness. Inflationary policies More financially comprehensive position. But Biden’s decision to step aside and endorse Vice President Kamala Harris as the Democratic nominee to replace him casts doubt on a Trump victory and will prompt investors to overcome those challenges.

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Trump’s team has said his pro-growth policies will lower interest rates and reduce the deficit. Many market participants believe deficits will continue to worsen under a second Biden administration.

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„It takes some of the air out of the Trump trade,” said Cameron Dawson, CIO of New Edge Wealth in New York, though he added that markets will wait for more clarity on who the nominee is.

„That’s when we can look for a reversal of Trump’s trade and other kinds of moves,” Dawson said.

Reuters/Ipsos poll As of Tuesday’s close, Trump held a narrow lead over Biden — 43% to 41% — among registered voters.

In accepting the Republican nomination on Thursday, Trump He promised again Cut corporate taxes and lower interest rates. Analysts expect a Trump presidency to create tougher trade relations, which could result in inflationary tariffs.

Lower tax revenues could widen the U.S. federal budget deficit, which has risen steadily over the past decade, including during Trump’s previous 2017-2020 presidency, although a spike in 2020 is largely driven by COVID-19 government relief.

Many investors believe the deficit will continue to worsen under a second Democratic administration, but a more balanced election result could reduce the risk of excessive fiscal stimulus expected if Republicans sweep Washington.

Segmented or clean sweep?

Congress is currently divided, with the House of Representatives narrowly controlled by Republicans and the Senate by Democrats. A divided government is seen by investors as a positive for markets because it makes it harder for either side to make dramatic policy changes.

Many Democrats warned that Biden’s initial refusal to let some Democratic donors close the spigots would also destroy Democrats in House and Senate races. Still, Biden’s ouster will increase the Democrats’ chances of controlling at least one of those chambers, Brij Khurana, fixed-income portfolio manager at Wellington Management, said ahead of the announcement.

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„A divided government, if it works, would mean much lower yields than they are now,” Khurana said, because the bonds would represent a more detrimental effect to government debt issuance.

Jamie Cox, managing partner at Harris Financial Group, said markets may now be reeling from what was previously expected to be a congressional sweep.

„The Senate is more likely to go Republican, but the House of Representatives is more vulnerable to a Democratic takeover,” Cox said.

Jack McIntyre, portfolio manager, global fixed income, Brandywine Global Investment Management notes further divided government as a possible outcome and „positive for the market.”

Fluctuations are expected

Investors said market volatility could increase due to lingering uncertainty over the election.

„Biden stepping down is a new level of political uncertainty,” said Gina Polvin, president of Polvin Wealth Management Group. „This could be a catalyst for overdue market volatility.”

Swats of the stock market, especially small caps, have responded positively to the prospect of a Trump victory in recent weeks. Cryptocurrencies have also rallied in inflation bets.

The Cboe Volatility Index — Wall Street’s „bear gauge” — It reached its maximum level on Friday in late April.

„The market doesn’t like uncertainty, and the addition of unknown Democratic candidates will certainly add to investor discomfort,” said Rafia Hasan, chief investment officer at Bericon Wealth in Chicago. „We don’t know what the market will do. With this news tomorrow and in the coming weeks, investors will have to sit tight.”

Reporting by David Barbuccia, Ira Iospashvili, Matt Tracy, Suzanne McGee, Sway Herbst-Baylis, Caroline Valetkevich, Carolina Mandel, Saeed Azar, Amanda Cooper; Editing by Michelle Price, Megan Davies and Aurora Ellis

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