The world’s biggest bond market got hit as traders weighed the potential economic implications of the November US election after last week’s presidential debate between Joe Biden and Donald Trump.

While many traders say it’s probably too early to start positioning or reading too much into election headlines, Wall Street kept a watchful eye on news regarding the presidential race. Just as it happened on Friday, Treasuries fell - with longer-term maturities largely underperforming shorter ones. Stocks edged mildly higher amid a rally in tech megacaps. The dollar rose.

Bloomberg News reported the Democratic National Committee is considering formally nominating Biden as early as mid-July to ensure he’s on November ballots. And a divided Supreme Court ruled that Trump has some immunity from criminal charges for trying to reverse the 2020 election results, all but ensuring that a trial won’t happen before the November election.

Investors are now looking toward the US election as an even bigger potential market event given that it currently appears Trump’s chances of retaking the White House have meaningfully improved, according to Ian Lyngen and Vail Hartman at BMO Capital Markets.

“During last week’s presidential debate, neither candidate proposed policies that would reduce the country’s fiscal deficit, which is growing unsustainable,” said Jose Torres at Interactive Brokers. “Meanwhile, the US political landscape is highly uncertain as members of the media and various Democrats call for Biden to step down from the race for the White House following his weak debate performance.”

Treasury 10-year yields approached 4.5%. The S&P 500 rose to around 5,475. Tesla Inc. jumped about 6%. Chewy Inc. whipsawed as Keith Gill - known as “Roaring Kitty” - disclosed a passive stake in the online pet product retailer. Gill was sued for allegedly orchestrating a “pump and dump” scheme involving GameStop Corp. shares.

The euro climbed as French election results suggested there’s a smaller probability of extreme policies coming from the far-right.

Following last week’s presidential debate that has shifted the probabilities of Trump winning over Biden, Morgan Stanley strategists Matthew Hornbach and Guneet Dhingra are re-evaluating their assumptions going into the elections.

“The key issue is the market now has to contend with rising probabilities of changes in immigration and tariff policies in an economy where growth has already been cooling, making the market more likely to price more rate cuts,” they wrote. “On the other hand, higher prospects of a Republican sweep, amid growing focus on deficits, could put upward pressure on long-end term premiums.”

“While the rates market may still trade increased risks of a Republican victory with a steepening bias for now, we see scope for the focus to shift towards risks arising from trade policy (where differentiation across outcomes is likely to be greater) as the election nears,” said George Cole at Goldman Sachs Group Inc.

While there’s a common debate about whether the timing of the election impacts the Federal Reserve’s policy choices, history shows the US central bank has not refrained from taking action during those years, according to Komson Silapachai at Sage Advisory.

Since the 1950s, the Fed has changed its policy rate in every presidential election year, with the exception being 2012, when interest rates were already at zero, Silapachai noted. Even during the second half of presidential election years, in the thick of campaign season, the Fed hasn’t shied away from shifting policy as economic and financial conditions warrant.

“The Fed will be guided by economic data, not political pressure, sticking to its main goals of managing inflation and unemployment,” Silapachai added.

The dollar should stay elevated in the second half of the year as a result of improving Treasury yield advantage, decent US growth strength and November election risks, JPMorgan Chase & Co. strategists led by Meera Chandan wrote.

Growth-supportive fiscal policies should also be dollar-positive in near term, despite deficit implications in the medium term, they noted.

Meantime, Morgan Stanley equity strategists led by Michael Wilson say investors “should stay selective” and maintain a bias toward quality US stocks heading into election season. Those companies have more stable earnings, stronger balance sheets and higher margins.

“Risks are skewed to the downside for growth under Republican win scenarios due in part to immigration reform and tariffs,” they wrote. With inflation and fiscal sustainability also in focus, such dynamics “are likely headwinds to lower quality, cyclical areas of the market and small caps in this scenario.”

Corporate America faces the highest earnings bar in almost three years as it prepares to report second-quarter results, according to Goldman Sachs Group Inc. strategists led by David Kostin.

“The magnitude of earnings-per-share beats is likely to diminish as consensus forecasts set a higher bar than in previous quarters,” Kostin said. “We expect the outperformance ‘reward’ for stocks beating estimates will be smaller than average again this quarter.”

  - Bloomberg