Are we back in a 'Trump trade' world? The US Presidential election is still four months away, but the relatively dramatic events of the past week mean markets are pricing in a high chance of a Trump victory. For investors, this means balancing the impact of proposed Trump policies of higher tariffs and spending – which are arguably pro-growth, but also inflationary – with major market drivers that include disappointing economic data, likely Fed rate cuts and near-term pullback risks.

Nevertheless, Standard Chartered in its investment editorial said it sees these divergences creating opportunities. SC added it would take advantage of short-term sectoral rotation within US equities and improving Japan market technicals. In bonds, the banking group said it believes the Fed will ultimately drive bond yields lower, adding some urgency to taking advantage of still-high yields.

Advantage Trump: Betting markets predict high chances of a win for Trump in November's US presidential election, a lead that surged after last weekend's assassination attempt. In financial markets, this triggered a revival of the 'Trump trade' narrative.

Sectors like energy posted gains on deregulation expectations even as technology fell amid tariffs concerns. Beyond equities, the USD weakened (albeit within recent ranges). While it has been argued that Trump's proposed policies should result in higher US bond yields, soft economic data and Fed rate cut expectations have thus far continued to push yields lower.

Macro and market fundamentals – the real drivers: The banking group believes the macro and markets environment has lent a significant helping hand to 'Trump trades'. Fed Chair Powell's rising comfort in signalling rate cuts in the second half of this year was supported by the Fed's Beige Book, that showed slowing activity and inflation regionally, and slowing inflation in prior weeks. US economic surprises also remain negative.

However, over the past week, retail sales, industrial production and housing starts surprised on the upside, suggesting US economic disappointments may be bottoming.

The sector rotation opportunity: US equities face stretched investor positioning, with its own proprietary indicator pointing to a two-thirds chance of a short-term pullback. However, much of this excessive optimism appears concentrated in the technology sector.

Over a short (1-3 month) horizon, it is likely the focus temporarily shifts to sectors like energy and financials (and even small caps). These sectors are potential beneficiaries of Trump's proposed tariff, spending and deregulation policy proposals, but they also stand to benefit from a correction in investor positioning.

USD/JPY fall to extend, improving Japan equity technicals: USD/JPY fell around 3% over the past week in a suspected policy intervention move. While history suggests intervention alone is unlikely to create a lasting currency move, for now the house sees a negative bias for USD/JPY with resistance at 157.60. The currency move has improved the near-term technical outlook for Japan equities, creating a regional rotation opportunity at a time when US markets face short-term reversal risks.

A narrowing window to lock in yields: While Trump's proposed policies are largely viewed as inflationary, we continue to expect bond yields to be driven by near-term Fed rate cut expectations. Recent data and policymaker comments supports the view the Fed will start cutting rates in H2 24, likely in September. This means investors face a narrowing window to lock in today's attractive yields before short- and long-term yields move significantly lower.