US Elections – Trumping markets
Early last week, former President Donald Trump released an interview discussing the plan for US, shall he be the next President. The plan for Trump 2.0 relies on corporate tax cuts, strong tariffs (particularly on China), and little involvement in foreign policy. As markets price higher chances of a Trump presidency, risk, particularly in US equities, should be supported, as the policy agenda focuses on growth and domestic firms. Europe and Asia can suffer more since tariffs have a growth cost. On the currency, the new administration will prefer a weaker USD, but trade policy is likely to trigger strengthening, in line with what happened in 2018-19. The net impact on bond markets is likely to be negative, as corporate tax cuts / extensions have a potential cost of $3-4tn over the next four years, meaning more pressure on long-end yields.

ECB – See you in September
The European Central Bank held rates steady at 3.75% at its July meeting. The press conference was uneventful, but the central bank guided for decent chances of a second cut in September. President Lagarde downplayed the recent uptick in inflation and recognised that 2024 growth is likely to be a bit slower than June projections suggest. The meeting strengthened our conviction that we are well into a cutting cycle for the ECB, although at a relatively slow pace and even more so considering the Fed will start cutting in September. Markets now price 80% chances of an ECB September cut, and a total of 100bp of cuts over the next twelve months.

Algebris Investments’ Global Credit Team