On the Margin Newsletter: What would a Trump sweep mean for markets?

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Welcome to the On the Margin Newsletter, brought to you by Ben Strack, Casey Wagner and Felix Jauvin. Here’s what you’ll find in today’s edition:

• What are the possible market tail risks if Trump wins and the GOP sweeps?
• The House is once again talking about SAB 121, but crypto fans will be disappointed.
• US spot BTC funds are half a year old. We take a quick look at how they’re doing.

Could a Trump win actually be bad for markets?

Setting aside personal political views, it’s becoming more likely every day that Trump will again become president of the United States. Democrats are split about what to do with an aging Biden, whose latest debate performance has put into question his ability to govern for the next four years.

Many crypto folks are rightly excited about a Trump presidency, as it would likely make for a more accommodative government from an industry regulation standpoint. Many have also bought into the idea that a Trump win would be positive for the US stock market as he would force the Fed to lower rates.

That is the consensus view, so let’s explore a couple possible tail risks I could see emerging with a Trump presidency and Republican sweep.

Tariffs causing an upswing in inflation

Goldman Sachs chief economist Jan Hatzius recently analyzed Trump’s heavy-handed tariff approach (10% on all imports coming into the US) and its potential impact on inflation and interest rates:

Essentially, the forecasted impact is the following:

• US inflation would increase by 1.1%.
• Inputting that inflation increase into a Taylor Rule model, the Fed would need to increase rates by 130 basis points.

Republican sweep leading to bond market tantrums

To quote Fed Chair Jerome Powell in his Congressional testimony this week: “The US fiscal path is unsustainable.” Indeed, one of the biggest issues for the stability of the US bond market is the egregious deficit spending going on during a time of economic expansion.

One potential scenario is that if Trump and Republicans pull off a sweep, we’ll move from the current gridlocked Congress to one given the green light to reduce taxes and increase spending. Setting aside personal opinions one might have on these policies, they undoubtedly lean towards higher deficits, not lower.

If this occurs unabated, the long end of the bond market will have even more long-term debt issuance to digest and absorb. Eventually, yields will need to rise to attract enough buyers for this tidal wave of debt.

That dynamic of losing control of the long end is a doomsday scenario for risk assets. If the 10-year bond soared to something like 8%, many risk assets would be taken to the woodshed.

These two potential outcomes need to be balanced with other positive-for-risk-assets policies Trump has talked about. Those include devaluing the US dollar, cutting regulatory red tape for many companies and lowering income taxes for individuals.

One thing is for sure: Despite my disdain for politics trickling into markets and having to pay attention to it all, it’s only going to get worse as we get closer to Election Day.

— Felix Jauvin

3%

The year-over-year increase for the consumer price index (CPI) in June — slightly below analyst expectations. The annual inflation rate is the lowest it’s been since June 2023, while core CPI has dropped to its lowest yearly level since April 2021.

Zach Pandl, director of research at Grayscale Investments, said the numbers are “overwhelming” evidence that US inflation has cooled. He expects the Fed to start signaling rate cuts at its July meeting before reducing them in September.

“Lower interest rates and a weaker dollar would be positive for bitcoin,” Pandl told Blockworks. “Grayscale Research maintains our belief that bitcoin could reach new highs this summer.”

That pesky ⅔ majority…

US Representatives voted this morning on whether or not to uphold President Biden’s veto of Joint Resolution 109. The law sought to invalidate the SEC’s staff accounting bill 121.

In an expected move, Reps voted not to override the veto. There were 228 Reps in favor of overturning Biden’s decision and 184 against. Ultimately, 290 of 435 House members (a two-thirds majority) needed to vote “yay.”

The bill marked the first crypto-related effort to pass both chambers of Congress in May, and went on to the president’s desk.

Biden vetoed the bill, siding with SEC Chair Gary Gensler. This was not shocking given the trend of presidents backing their agency heads.

The Biden administration said the way lawmakers tried to axe SAB 121 was problematic. The Joint Resolution was brought under the Congressional Review Act, which the administration noted could set a precedent that would “inappropriately constrain the SEC’s ability to ensure appropriate guardrails.”

Meanwhile, House Financial Services Committee Chair Patrick McHenry argued just the opposite: Congress must step in to constrain the SEC’s abuse of power.

“​​SAB 121 is one of the most glaring examples of the regulatory overreach that has defined Chair Gary Gensler’s tenure at the [SEC],” McHenry said on the House floor Wednesday.

Now the question is whether lawmakers will try to pass a different bill that sidesteps the Congressional Review Act altogether. It’s an election year though, so things are playing out pretty slowly. Plus, the odds of another Biden veto are extremely high.

— Casey Wagner

Half a year of trading

It’s the 11th of July, which means US spot bitcoin ETFs are another month older.

Half a year to the day, in fact.

The funds have enjoyed $15.4 billion of net inflows in their first six months. That includes roughly $800 million in the last four trading days alone.

Here are a few more facts about the ETF category thus far:

• The segment has seen cumulative net inflows on 82 of 124 trading days (about two-thirds of the time).
• These funds had record single-day net inflows of $1.05 billion on March 12. The biggest net outflow day was May 1, when $564 million collectively left the funds.
• BlackRock’s iShares Bitcoin Trust (IBIT) saw inflows in each of its first 71 days, an unprecedented run for a new ETF. It has only tallied net outflows on one day ($37 million on May 1).
• In all, IBIT easily leads with $18 billion of inflows to date, while Grayscale’s GBTC has seen $18.6 billion in outflows.
• Five of the US spot bitcoin ETFs have at least $2 billion in assets (BlackRock, Fidelity, Grayscale, Ark/21Shares and Bitwise). Then there’s a fall-off, with VanEck’s fund (ranked sixth) at roughly $600 million in assets.
• Shares of IBIT, the largest BTC fund (and almost back on the top 100 biggest ETFs list), are up about 24% on the year — roughly in line with BTC’s price rise since then.

Overall, institutions are buying into bitcoin funds, and financial advisers have begun allocating to them on behalf of clients.

But Leah Wald, former CEO of bitcoin ETF issuer Valkyrie Investments, told Blockworks in a recent interview that the category remains in “the first inning.”

“[Registered investment advisers] and other wealth management platforms are still getting a handle on getting through due diligence questionnaires to be able to get them on the platforms and able to answer questions from their clients on this asset,” she said.

Soon, spot ETH funds will be trading in the US, offering these investors another easily-accessible crypto option. It may take some time before they jump in.

— Ben Strack

Bulletin Board

• Stocks took a dip this afternoon, with the S&P 500 and Nasdaq Composite indexes down 1% and 2.2% on the day, respectively, as of 2 pm ET. Cryptos, on the other hand, fared better, with bitcoin and ether up 0.3% and 1%, respectively, over the past 24 hours.
• The Senate Banking Committee gathered Thursday to question four Biden nominations: Christy Goldsmith Romero, nominated to become FDIC chair; Kristin Johnson, put up to be an Assistant Secretary of the Treasury; Gordon Ito, nominated to be a member of the Financial Stability Oversight Council; and Caroline Crenshaw, nominated for a second term as an SEC commissioner.
• During testimony before the Senate Wednesday, CFTC Chair Rostin Behnam claimed “between 70% and 80%” of crypto assets are not securities. We know Gensler begs to differ.

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