Red tide it is. We were slightly surprised by the scope of Trump's victory, though not by Republicans winning a significant Senate majority.
Market response has thus far been in line with our expectations for this scenario.
The House has not yet been called, but our base case is a Republican sweep.
What happened?
Despite the headlines and Trump's significant and unexpected victory in the popular vote, the election itself was relatively close: ~2% in the 3 battleground states destined to determine this election (WI, MI, PA).
But Trump also outperformed across the board, including in deep red (FL, TX) and deep blue (NY, NJ) states.
The Republicans also significantly outperformed in the Senate and have already secured 52 seats. They remain competitive in 4 more, so are likely to end with more than 52 seats--a comfortable majority that will allow the leadership to sideline institutional Republicans such as Lisa Murkowski (R-AK) and Susan Collins (R-ME).
The House has yet to be called, but the chances of Republican control are high (80%).
What does this mean for markets?
The policy effects will be significant in any case, and markets are already reflecting a red trifecta. As expected, 10-years sold off ~18bps, and the dollar gained over 2%.
The positive reaction in equities markets was somewhat less expected (futures pointed to a 2.2% increase in the SP 500 this morning and over 6% for the Russell 2K). It is also, in our view, less likely to last.
The other two trades certainly have legs, and if Republicans hold the House, we remain bearish 10Y expecting a steepening of the curve. The dollar, too, could see more strength if Trump moves to enact his trade agenda.
The risks will now migrate from politics to policy. Trump's trade and immigration policies are likely to be implemented fairly quickly. Because they are inflationary, they could force the Fed to end its cutting cycle early.
The market has moved a bit in this direction already, taking the December 2025 implied rate up 16bps to 3.78. We view these risks as tilted to the hawkish side, though we continue to expect two more cuts this year.
For long-end rates, fiscal policy will play a bigger role. The 119th Congress will be seated on January 3, 2025--one day after the debt ceiling suspension expires.
With a Republican House, we would expect a swift and dovish resolution of the debt ceiling early this year, as well as the groundwork for a major fiscal bill that will extend and expand the TCJA tax cuts while also cutting back on some of the Democratic policies passed under the IRA.
It is hard to imagine such significant fiscal expansion taking place without a fight with bond markets. We thus remain wary of duration across U.S. fixed income.
With the notable exception of Europe and Japan, yields are selling off worldwide--a trend that we expect will continue, albeit to a lesser degree than in the U.S.
Is there a playbook for what happens next?
We are glad you asked! Over the past few months Aurora researchers have been putting together guides to different markets and geopolitical theaters around the world.
Ukraine and Russia
U.S. Fiscal Policy
Latin America
Middle East
International Trade
If you are not a client, you can request them using the link here and a member of team will be in touch.
All best,
Daniel, Dimitris, and the Aurora team.
To book a meeting with me to discuss these or any other Aurora themes contact juliet@auroramacro.com
Aurora Macro Strategies is your trusted partner in understanding the global geopolitical and macroeconomic landscape.
This newsletter is a general communication being provided for informational and educational purposes only. It is not designed to be a recommendation for any specific investment product, strategy, plan feature or other purposes. By receiving this communication, you agree with the intended purpose described above. Any examples used in this material are generic, hypothetical and for illustration purposes only. Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.
None of Aurora Macro Strategies, LLC, its affiliates, or representatives is suggesting that the recipient or any other person take a specific course of action or any action at all. Prior to making any investment or financial decisions, an investor should seek individualized advice from personal financial, legal, tax and other professionals that consider all of the particular facts and circumstances of an investor's own situation. Neither Aurora Macro Strategies or any third party involved in or related to the computing or compiling of the data makes any express or implied warranties, representations or guarantees concerning information or perspectives included in written research. In no event will Aurora Macro Strategies or any third party have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) relating to any use of this information.
This report has been created without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally but should not be construed as a recommendation to buy, sell, or hold the company’s stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments.
The text, images, and other materials contained or displayed on any Aurora Macro Strategies, LLC product, service, report, email, or website are proprietary to Aurora Macro Strategies, LLC and constitute valuable intellectual property. No material from any part of www.auroramacro.com may be downloaded, transmitted, broadcast, transferred, assigned, reproduced or in any other way used or otherwise disseminated in any form to any person or entity, without the explicit written consent of Aurora Macro Strategies, LLC. All unauthorized reproduction or other use of material from Aurora Macro Strategies, LLC shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Aurora Macro Strategies, LLC expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Aurora Macro Strategies, LLC reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.
The recipient should check any email and any attachments for the presence of viruses. Aurora Macro Strategies, LLC accepts no liability for any damage caused by any virus transmitted by this company’s electronic communications.
Aurora Macro Strategies LLC, 55 Broadway, New York, NY 10006, United States
