A breather for Trump trades
The assassination attempt on Donald Trump, combined with ongoing weak US data, resulted in a perfect storm of bull steepening in US Treasuries, a rally in store of wealth assets (gold and bitcoin), and a violent squeeze in cyclical small caps. The mini-regime was based on current expectations of weak and disinflationary data that would compel the Fed to cut, combined with a forward outlook of reflationary policies once Trump enters office with the full backing of the Senate and the House. I took a stab at riding these trends by being long SOFR Dec 2025 futures and Russell 2000 futures, but closed them on Friday and today, as I think we will see some pullbacks in equities, rates, and crypto for the next weeks.
The reasons are both political and economic data driven. Last week we saw peak confidence towards Trump winning in a Republican sweep. Biden pulled out of the race today - a move that many saw as inevitable - and the search is now on for viable Democrat candidates who have a good chance of challenging Trump. The odds of a Republican sweep will likely pull back as a result, unwinding some of the steepening in the Treasury curve and outperformance by small cap equities.
On the economic side, last week we saw a string of strong economic data surprises in the US, such as retail sales, Empire manufacturing, and Philly Fed data. The US economic surprise index has ticked up from depressed levels. Economic surprise indices are by nature mean-reverting - as data gets weaker, economists extrapolate the weakness into their forecasts, resulting in upside data surprises down the line. The disinflationary regime has been supported by consistently weak US economic data since April, but I fear that this run is about to end.
For that reason, I want to be patient buying the dip in equities for now - both the S&P 500 and Russell 2000. I can see IWM pulling back to its original breakout level and forming a base there. I still believe in the case for small cap outperformance in the long run, so I’d like to buy the retest of 2120 in RTY futures - the equivalent of 210 in IWM.
Rates have been choppy all year, and it looks to continue to stay that way. I wouldn’t be surprised to see a 10-20 bp bounce in 2 to 5 year Treasury yields. A 25 bp rate cut is fully priced in for September, so we would need to see some significant downside data misses for yields to continue selling off.
I can also see bitcoin pulling back into a 63-65k range on slightly tighter financial conditions. As for ETH - the market has low expectations for how much the ETFs will attract in inflows, which makes me think that risk is skewed in favor of ETH outperformance over the next 1-2 months.
I highlighted in my previous post that seasonality for the S&P 500 is neutral to negative until October. I’m not bearish equities, but I do think that we will see some choppy sideways action for a while.
Overall the Trump assassination attempt generated some volatility in the market, but it wasn’t enough to break most markets out of their summer ranges (with the exception of small caps). Attempting to trade the summer doldrums can be hazardous to one’s trading capital, so I will be patient in waiting for good entry points or changes in global macro fundamentals.
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