Watch the The Trump Effect Trade for Clues
As I have noted, when there is a key event traders generally price in the most extreme case as reassess afterwards. This was the case with the “Trump Trade” following the November 5th U.S. election.
In this article I will show how the Trump Trade gave a clue to the price moves that followed and what may now lie ahead.
What is the Trump Trade
- Sell bonds (higher inflation, bigger deficits)
- Buy dollars (fallout from. tariffs)
- Buy stocks (pro-business, less regulation)
The closing days of November, albeit in thin liquidity due to the U.S. Thanksgiving Day holiday, saw bond yields fall sharply, the dollar tumble, most notably vs the JPY, and stocks firm into record territory. This is only one of the three Trump Trade components (i.e. equities) that followed the post-election script.
It all started a few days ago when President-elect Trump said on day one he would impose a 25% tariff on all products from Canada and Mexico and an additional 10% levy on Chinese imports.
What caught my attention in what turned out to be a sharp, short-lived reaction is that U.S. Treasury yields did not join in. This was a hint that the threats were not to be taken literally and were likely part of a negotiating strategy. I call this Bog Stick Diplomacy.
My goal in this article is not to give a history lesson but to use what has occurred as a clue to what may lie ahead.
Putting the puzzle together
We will see in the coming days how much of the moves were due to month end flows in thin markets
Putting my puzzle together I plan to keep a close eye on US bonds to see whether yields continue to slide or back off and if markets, specifically forex, correlate with the moves.
Source CNBC
In this regard keep on eye on a full US calendar (see full economic data previews) this week and how bonds react to the data. This will give a clue whether the recent price moves were a hiccup in the Trump Trade or if there is more to it.
Addendum: Thhs came oiut over the weekend… More Big Stick Diplomacy?
Trump threatened Saturday to impose 100% tariffs on a nine-country bloc if they act in ways that weaken the value of the dollar.
BRICS+ countries = Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Iran and the United Arab Emirates.
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