Domestic Politics
Harris picked Walz to patch up her weak side in the electorally vital Midwest. But the US election will continue to weigh on risk appetite, stocks, and high-beta assets because the odds of a single-party sweep are at least 50%, probably higher. Policy uncertainty and risk premiums will rise, not fall, in the coming months.
GeoMacro team partners with BCA’s Emerging Markets Strategy to examine political reforms in Argentina. Our colleague Juan Egaña argues that the time is not right to go long Argentinian assets and that Buenos Aires must avoid the mistakes of the Macri era: opening to foreign capital flows too soon without addressing structural macro imbalances. However, the Milei administration is on the right path with potentially global implications.
The decision by GeoMacro team on July 2 to short USDJPY and underweight equities has proven to be prescient. We still do not like the market setup from here on out. A recession would, obviously, be negative for risk assets. But even if investors avoid that scenario, the transition from cash- to leverage-driven growth is unlikely without a significant Fed rate-cutting cycle.
Republicans are favored but the election is still competitive. Equities, corporate credit, and cyclical sectors will fall until policy uncertainty is reduced.
Oil markets will not be impacted by Venezuela in the near term, but by shocks from the Middle East. Maduro’s ability to stay in power in the short-term removes an avenue of oil supply relief. The same avenue is cut off if Trump is reelected. Geopolitical shocks in Venezuela could present tactical buying opportunities for Chile, Peru, and Colombia.
This report provides our framework for interpreting the messages from last week’s Third Plenum, and the potential implications for the economy and investors.
Investors should focus on growth concerns rather than the “Trump trade.” Bond yields will fall in the short run due to cyclically disinflationary economic slowdown, rather than rise in anticipation of a Republican full sweep and inflationary policies, which are likely but not yet a done deal.