Over the course of President Trump’s political career, the President has changed the art of presidential communications from formal announcements to… well, tweets.
The instant reach that the President has with his tweets is undeniably efficient. Although, it appears that they are less well received by traders than traditional presidential announcements.
During his presidency, President Trump has tweeted a lot and has only ramped this number up as his term has progressed. According to Statista, President Trump tweeted 7,818 times in 2019 and has already tweeted more than 10,000 times in 2020. This means that, in the final half of his presidency, Trump has tweeted between 21 and 27 times per day. The President’s current daily tweet record is at an astonishing 200 tweets in a day with his single hour tweet record at a thumb-busting 74 tweets.
And despite the seemingly great communication that 1.23 tweets-per-minute might imply, they seem to be ramping up volatility in the markets rather than reassuring them.
What is Volfefe?
Volfefe is a stock market volatility index created by JP Morgan which tracks the market sentiment of U.S. Treasury Bonds as related to tweets by the President. The name is a play on words with Trump’s infamous and mysterious "covfefe" tweet.
JP Morgan’s analysis found that the two and five-year Treasury bond yields are negatively impacted by certain tweets from the President. Most notably, in tweets regarding trade with some keywords being “China,” “billion,” and “products.”
This shows up in higher premiums in “swaptions” in the five-minutes after select tweets from the President. This means traders are expecting higher volatility in the future in the periods after these tweets.
Where Else Does the Trump Premium Show in Markets?
Unfortunately for traders, the Trump Premium extends out from Treasury yields and the more institutional market of swaptions to other more mainstream securities.
During the lead up to the election, Trump has increased uncertainty in the public as he refrains from committing to a peaceful transfer of power and casts unwarranted doubts on the efficacy of mail-in-voting. Because of this, Implied Volatility has expanded and resulted in higher premiums in options contracts. This is because options are insurance contracts and, due to the increased demand for ensuring the safety of investments, their prices have increased.
The foreign exchange market is another place which faces a Trump premium, and even has similar correlation to tweets as found in Volfefe. Citi analyzed the US Dollar’s standing in global markets following tweets by the President about certain subjects. Citi found that the USD signals weakness relative to the Euro and the Yen following tweets regarding trade, from 2016 to 2019.
What Does it Mean for Investors?
Going forward, investors should be mindful of Trump’s ability to sway markets through a tweet storm and the fact that, during an election in the middle of a pandemic, this power seems to have grown stronger.
The Trump Premium which is found throughout the market is a reflection of the President’s ability to be a bit of a loose cannon. This is, at least in part, due to investors being unsure of what may come in the months after the election, particularly if the President were to lose. Could this bring out an even more unpredictable President? One that loses interest in the job? Or would he proceed with business as usual?
Due to that uncertainty, investors should seek investments that are safer in nature, which gets rather sticky because many of those safe-haven investments are not the same in a pandemic as they were in more normal times. Because of this, it may be useful for investors to engage themselves in a mind-game and plot out the behaviors that you think Trump may exhibit if he loses the election. One example here could be that if you think he could try to implement tariffs and a stronger stance on China, then the right call may be to avoid companies that rely heavily on China for their supply chain solutions.
