STOCKS in Asia are set to fall, while bonds in the region are likely to track Treasuries lower as traders weighed the possibility of another Donald Trump presidency in the wake of his debate with Joe Biden last week.
Tokyo and Sydney equities were poised to open lower, with Hong Kong shares to reopen after a holiday. With many investors keeping a watchful eye on news regarding the presidential race, Treasuries fell – with longer-term maturities largely underperforming shorter ones. 10-year yields approached 4.5 per cent, while Australia’s 10-year yield advanced six basis points in early trading on Tuesday (Jul 2).
Contracts for US equities declined during Asian hours, despite Wall Street edging mildly higher on Monday amid a rally in tech megacaps. The US dollar rose.
Bloomberg News reported the Democratic National Committee is considering formally nominating Biden as early as mid-July to ensure he’s on November ballots. Elsewhere, a divided Supreme Court ruled that Trump has some immunity from criminal charges for trying to reverse the 2020 election results, all but ensuring that a trial won’t happen before the November election.
Investors are now looking towards the US election as an even bigger potential market event given that it currently appears Trump’s chances of retaking the White House have meaningfully improved, according to Ian Lyngen and Vail Hartman at BMO Capital Markets.
“During last week’s presidential debate, neither candidate proposed policies that would reduce the country’s fiscal deficit, which is growing unsustainable,” said Jose Torres at Interactive Brokers. “Meanwhile, the US political landscape is highly uncertain as members of the media and various Democrats call for Biden to step down from the race for the White House following his weak debate performance.”
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In China, pessimism about the domestic economy has sparked a surge in demand for government bonds. The central bank said it will borrow government bonds from primary dealers, a sign it may be contemplating selling securities to cool down the rally.
Meanwhile, the prospect of a Bank of Japan interest rate hike coming later this month increased after an index showed confidence among the nation’s large manufacturers rose from three months earlier.
In Europe, European Central Bank president Christine Lagarde signalled that there is not sufficient evidence that inflation threats have passed, feeding expectations that officials will take a break from cutting interest rates this month. The euro climbed as French election results suggested there’s a smaller probability of extreme policies coming from the far-right.
Following last week’s presidential debate that has shifted the probabilities of Trump winning over Biden, Morgan Stanley strategists Matthew Hornbach and Guneet Dhingra are re-evaluating their assumptions going into the elections.
“The key issue is the market now has to contend with rising probabilities of changes in immigration and tariff policies in an economy where growth has already been cooling, making the market more likely to price more rate cuts,” they wrote. “On the other hand, higher prospects of a Republican sweep, amid a growing focus on deficits, could put upward pressure on long-end term premiums.
While there’s a common debate about whether the timing of the election impacts the Federal Reserve’s policy choices, history shows the US central bank has not refrained from taking action during those years, according to Komson Silapachai at Sage Advisory.
In commodities, oil steadied on Tuesday after climbing to the highest in more than two months as traders took stock of mounting geopolitical risks in Europe and the Middle East as well as a hurricane in the Caribbean. Elsewhere, gold held onto a slight gain. BLOOMBERG