WEEKLY | USA: Growing Political Risk

Following the attack on presidential candidate Donald Trump the weekend before last, and the insistence of current president Joe Biden to stay in the presidential race against all odds (until yesterday afternoon), market players triggered a pronounced rotation in their investment portfolios, withdrawing positions in the technology industry and moving towards the anchored healthcare sector, as we commented in previous editions. 

It was in this environment that the Dow rose +0.7% during the week while the S&P 500 and the Nasdaq fell -2.6% and -3.6%, respectively. This led the three indices to accumulate year-to-date returns of +6.9%, +15.4% and +18.1%, respectively. Meanwhile, the 10-year sovereign rate, even as inflation continues to gradually ease, climbed to 4.25% (+5 basis points) in anticipation of the next monetary policy meeting to be held on July 30 and 31, with representatives of the Federal Reserve (FED) already entering the period of silence before that meeting. However, it would seem that after several months in which political risk was not being incorporated into market valuation, it only took a couple of Trump's comments about Taiwan and Biden's insistence on continuing his presidential run for political risk to take hold and investors globally opted to cut profits and increase their cash positions. Thus, the markets of Germany, Brazil, Japan and Mexico, for example, fell an average of -2.2% the previous week. 

At the same time, on Friday, Crowdstrike and Microsoft paralyzed the world economy after an update by the cybersecurity company generated a problem in Microsoft's software, paralyzing airlines, hospitals, banks and many other industries worldwide. In between, yesterday afternoon, President Biden opted to lower his candidacy for the presidency giving way to another round of political uncertainty in the country as the Democratic party is fractured in who from today until the following August 19 could assume the presidential candidacy to compete with former President Trump. 

This week ahead the political arena will continue to be hot as factions over the presidential nomination within the Democratic party have already made their presence felt, a topic we will address in more detail below. 

On the macroeconomic front Thursday will see the release of the first economic growth figure for the second quarter of the year estimated at 2.2% to follow up on the previous month's PCE inflation figures with headline estimated at 2.4% (up from 2.6%) and core inflation, that which excludes food and energy prices, at 2.5% (up from 2.6%). On the corporate front, Crowdstrike and Microsoft will have to give stronger explanations of what happened, as the impact on the global economy was not minor. Meanwhile American Airlines, AT&T, Alphabet (Google), Ford, Chipotle, GM, IBM and Tesla among many others will be reporting their second quarter results. According to Factset, sales have been growing by +4.7% and profits by +9.7% compared to the second quarter of the previous year. This week 138 S&P 500 companies will be reporting this week, including those mentioned above. 

Let's start briefly with the comments that Fed Chairman Jerome Powell made last Monday about the evolution of interest rates by arguing that: 

I'm not going to send any signals one way or the other about any particular meeting, we're going to make these decisions on a meeting-by-meeting basis. The implication of that is, if you wait until inflation is fully down to 2%, you've probably waited too long, because the tightening you're doing, or the level of tightening you have, is still having effects that will probably take inflation below 2%. What increases that confidence [of proceeding with a policy rate cut] is more good inflation data, and we've been getting some of that lately.

Having noted that, presidential candidate Donald Trump, in an interview with Bloomberg, noted that it would be inappropriate for the Fed to opt to lower the policy rate before the presidential election in November, thereby crying political interventionism if Powell proceeds in such a manner. This despite the fact that the market is assigning him a 92% probability of lowering the interest rate at the mid-September meeting regardless of the complex political scenario. 

In this same interview, presidential candidate Trump made a comment about Taiwan that triggered the microprocessor sector to take profits by arguing not only that Taiwan had appropriated U.S. intellectual property, but also that they should pay for the national security provided by the United States, setting a new course for relations between the two nations if Trump wins the presidency. As early as Thursday, the repercussions of the Crowdstrike operating systems update event were already being felt, and as of yesterday afternoon it was still generating problems in some global industries. Microsoft said the problem has been resolved, however, the impact would have affected 8.5 million Windows operating systems, marking the largest technological problem in history. 

Finally, without making value judgments, the U.S. political scenario has become more complex after President Biden withdrew his candidacy. He immediately endorsed his vice-president Kamala Harris for the presidential race with the support of the Clinton family. However, former President Obama, together with another powerful group of the Democratic Party, pointed out that the convention will choose the best presidential candidate without even mentioning Harris in their comments. Even The New York Times refrained from endorsing Harris' candidacy, thus marking an unprecedented internal division in the Democratic Party. The argument is that Harris was covering up Biden's delicate health, making him complicit in this process, and that his bid for the presidential candidacy in 2020 ended without electoral support. So we will see how this new story unfolds, since it is the first time that a president withdraws from a presidential race only four months after being nominated by his party. 

In conclusion, after a strong stock market start during the first half of the year, political risk has been felt within the risk premium not only because of the convoluted U.S. political environment, but because presidential candidate Trump once again rang the bells of nationalism too loudly impacting the technology sector.     

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