At the beginning of a new week, investors will be busy determining whether U.S. President Biden's decision to end his reelection campaign and support Vice President Kamala Harris will increase or decrease the chances of Donald Trump returning to power.

Traders' earliest response will be during Monday's Asian session, and foreign exchange market trading will then rebound.

A catastrophic debate has raised concerns about 81-year-old Biden's ability to serve another term as president, and in the weeks that followed, financial markets reduced the likelihood of his reelection. They are generally bullish on trades that benefit from the loose fiscal policy, higher trade tariffs and weakened regulation advocated by Trump.

The specific manifestation is that the US dollar is supported, US bond yields rise, bank stocks, medical stocks, energy stocks and bitcoin rise.

The question facing investors is whether to stick with these trades now that Biden has dropped out of the race. As investors wait to see if Harris can lock up the nomination, and weigh whether she can generate enough momentum to challenge Trump's lead in the polls, market movements could be volatile.

"Investors should expect volatility to skyrocket," Dave Mazza, CEO of Roundhill Financial, said before the news was announced on Sunday. "If Vice President Harris can quickly mobilize and give Trump a substantive blow, then we should expect the volatility to continue. However, if Trump continues to lead in the polls and investors believe his victory is inevitable, 'Trump trades' will prevail and volatility will decrease."

There is almost no historical data to interpret how the market will react. The most recent example of a sitting president not seeking re-election was Lyndon B. Johnson in 1968.

Grace Fan, executive director of global policy research at GlobalData. TS Lombard, wrote in a report on July 17 that the replacement of the Democratic candidate meant that "as the market readjusts the odds, Trump trades would be shaken." But she said that if Harris became the ultimate candidate, these bets were "unlikely to change significantly."

Bonds and currencies

If there is a greater possibility of Trump returning to the White House, the outside world generally expects the US dollar to be boosted. Trump's preference for a combination of low taxes and high tariffs is believed to stimulate inflation and interest rates, thereby increasing the attractiveness of the US dollar. As a safe haven, the US dollar will also have higher demand in uncertain times.

However, in an interview in June, Trump stated that the strong US dollar is damaging to the competitiveness of the USA. His running mate James Walsh also expressed this view in the past. After the interview was released, the USD/JPY exchange rate fell last week.

"We don't think this is the right trade," Barclays strategists said in a report on Sunday. "We believe that Trump's second term will mean that the US dollar will continue to strengthen, and the recent decline provides a good level for repositioning in the long position that we recommend."

The conclusion that Trump would cause inflation has also permeated the world's largest bond market, and traders have started buying shorter-term bonds and selling longer-term bonds, a so-called steepening trade.

"The Democrats' chances of winning the House of Representatives have also increased as Harris' chances of winning have increased," said Steven Englander, a strategist at Standard Chartered Bank in New York. "If the situation develops in this way, concerns about further fiscal stimulus may be reduced, easing pressure on interest rates and the US dollar. However, it is still too early to tell, and the election may be very different from what was expected just two weeks ago."

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