Citibank warns: Don't just focus on the "Trump trade", the Federal Reserve is the key!
Citibank warns investors not to focus only on the "Trump trade", the Federal Reserve is the key factor. Investors are betting that the Federal Reserve will cut interest rates in September, or start a rate-cutting cycle later this month. Federal Reserve Chairman Powell stated that the Federal Reserve is increasingly confident that inflation is moving towards its long-term target of 2%. On Wednesday, Federal Reserve Board member Waller stated that the Federal Reserve will cut interest rates in the "near future". Before the November US presidential election, investors should focus on preparing their investment portfolios for a environment of declining interest rates
Just a week after the attempted assassination of former U.S. President Trump, investors seem to have shifted their focus away from the "Trump trade".
The "Trump trade" refers to investors adjusting their asset allocation for Trump's second term in office. This trade was vividly displayed on the first trading day after the day Trump survived the assassination attempt.
But now, the Fed is once again leading the market agenda.
According to foreign media analysis, options positions tied to overnight funding rates indicate that investors are betting on the Fed cutting rates in September, or starting a rate-cutting cycle later this month.
Michael Schumacher, Head of Global Macro Strategy at Wells Fargo Securities, said, "The Fed may be the dominant force until early November, and then political factors will truly come into play."
Schumacher stated that the "Trump trade" has now essentially ended.
Of course, most analysts agree that objectively speaking, Trump's second term, including his government's trade and tariff policies, will have significant impacts on the macroeconomy and markets.
However, as Vishnu Varathan, economist at Mizuho Bank, wrote earlier this week, "It is premature to draw conclusions about the market implications of 'Trump 2.0'."
He added that, especially due to Trump's policies, "Trumpflation" may manifest in the coming months.
Currently, the market is focused on when the Fed will cut rates, especially after June's CPI data came in below expectations, with year-on-year growth slowing to 3%, the lowest level in a year.
Fed Chair Powell stated on Monday that the Fed is increasingly confident that inflation is moving towards its long-term target of 2%. He also mentioned that the Fed does not need to wait for inflation to fully reach this level before cutting rates.
On Wednesday, Fed Governor Waller stated that the Fed will cut rates in the "near future".
Analysts at UBS stated that amidst the noise leading up to the November U.S. presidential election, investors should not overlook "fundamental factors". The analyst wrote on Tuesday:
"While U.S. political developments may cause market volatility ahead of the election, we believe investors should focus on preparing portfolios for a lower interest rate environment, while also keeping an eye on technological advancements."