Want to know when the "Trump Trade" will end? Morgan Stanley: Just watch it!
JP Morgan pointed out that investors should pay attention to the government bond market to gauge signs of fatigue in the "Trump trade," especially when the 10-year U.S. Treasury yield reaches 5%, which could become a turning point for the stock market. Currently, the yield is around 4.3%. The bank believes that if the yield breaks above 5%, it will have a negative impact on stock valuations. If the Trump administration implements stimulative fiscal policies, it may lead to an increase in bond yields, thereby affecting stock market performance
As the market enthusiasm triggered by President Trump's election victory drives the stock market and cryptocurrencies to historic highs, JP Morgan stated that if investors want to look for signs of fatigue in the "Trump trade," they should pay attention to the bond market.
The stock strategy team led by global equity strategist Mislav Matejka in their latest research noted that a 5% yield on the 10-year U.S. Treasury could become a turning point for the U.S. stock market after a significant rise. Currently, the yield is around 4.3%. They wrote in a report on Monday:
"We believe that when yields approach around 5%, the impact of bond yields on stock valuations will begin to shift from a positive/reflationary effect to increasing concerns about the sustainability of rising inflation and the risk of accidents."
In anticipation of Trump's victory, U.S. Treasury yields surged as the market expected the president-elect's immigration and trade protectionist policies to drive up inflation, forcing the Federal Reserve to raise interest rates. The yield on the 10-year U.S. Treasury rose by as much as 21 basis points to 4.47% the day after the election.
"Bonds vigilantes" may sell Treasuries due to the swelling federal deficit, which also exacerbates the upward pressure on U.S. Treasury yields.
Ed Yardeni, president of Yardeni Research, noted in a newsletter published last Saturday that, "If the Trump administration implements overly stimulative fiscal policies with significant spending and tax cuts, leading to a further expansion of the deficit, I believe this could push yields to levels that pose problems for the economy."
JP Morgan stated that if the 10-year U.S. Treasury yield does not break through 5%, then the market's direction in the short to medium term will depend on the policies prioritized by Trump.
JP Morgan indicated that if the president-elect's second term begins with immigration restrictions and increased tariffs, the stock market will face challenges. Meanwhile, the bank stated that if Trump focuses on tax cuts, it would be beneficial for the stock market