• ★President Biden dropped out as Democratic candidate for November’s US election, in favour of his Vice President Kamala Harris.
• ★US Q2 GDP data came in higher than expected at 2.8%, boosted by consumer spending and investment.
• ★Sector rotation hit US equities, as US tech stocks tumbled, while the Russell index of small caps surged.

Geopolitics

US election drama

After surviving an assassination attempt, Donald Trump moved ahead in the polls. Joe Biden later withdrew from the presidential race, passing the baton to the younger generation. Vice President Kamala Harris looks set to replace him as the Democratic contender, as she gained high profile backers and money poured into her campaign. Nonetheless, some markets ran with the ‘Trump trade’. Long bond yields rose slightly, as prices fell, in anticipation of a re-igniting of inflation if Trump is re-elected. Overall, the election became harder to predict, described by some as a state of “high octane uncertainty”.

Central banks

Disinflation stutters

According to the old adage, “inflation goes up like a rocket and down like a feather”. After a number of downward steps earlier this year, the IMF (International Monetary Fund) warned that the pace of disinflation now appears to be slowing. Which could leave interest rates set to remain “higher for even longer”. Both the ECB and the US Federal Reserve (Fed) kept rates unchanged in July, although betting odds on a September Fed rate cut moved to 100%. Meanwhile, a furious Donald Trump claimed a rate cut ahead of November’s election would boost the Democrat campaign.

Technology

Chips are down

The tech sector was hit by profit taking. Donald Trump triggered the rout with tough words against Taiwanese chip giant TSMC. Chip stocks cascaded across Asia, before the sell offs rolled on to US and European producers. In a ‘punishment market’, stocks were knocked further after disappointing quarterly earnings numbers from tech leaders. Soaring AI capex at Alphabet (Google parent) set the negative tone, followed by a delayed product launch for Tesla’s autonomous cars. Elsewhere among the Magnificent 7, Microsoft gave up its seat as observer on the board of ChatGPT creator OpenAI, in response to scrutiny fears.

Responsible investing

Market repercussions

Shares in wind and solar energy companies sold off sharply in the wake of the assassination attempt on Donald Trump, as the likelihood of a second Trump administration was briefly seen to increase. Trump has previously promised to halt all offshore wind projects on his first day back in the Oval Office. Conversely, shares in gun companies jumped. However, Joe Biden’s subsequent decision not to stand for a second term might alter the dynamic, particularly if Kamala Harris makes climate change a focus of her campaign.

• ★Markets will be gripped by speculation over a September interest rate cut, after Fed chair Powell signaled increasing confidence that inflation is moving back towards target.
• ★In response to evolving opinion polls, traders could start to unwind early ‘Trump trade’ positions as the November election looks set to be a closer call.
• ★The process to build a coalition government in France will commence after the Paris Olympics, as no party won an outright majority in the recent parliamentary elections.