The 'Trump trade' is winding down, and the Fed's rate plans are back in focus

• Investors are shifting their focus from the 'Trump trade' to the Federal Reserve's interest rate decision.
• The 'Trump trade' refers to market strategies anticipating a second Trump presidency.
• Fed Chair Jerome Powell has signaled rate cuts as inflation cools.

Barely a week after the failed assassination of former US President Donald Trump, investors are already moving on from the "Trump trade."

The "Trump trade" refers to investor strategies that reflect the market consequences of a second Trump presidency. This trade was in full display on Monday — the first trading day after the Saturday assassination attempt.

But now, the Federal Reserve is taking over the market's agenda again.

Positions of options tied to the Secured Overnight Financing Rate — which reflects the pricing of overnight loans collateralized by US Treasury securities — pointed to fresh bets involving a big Fed rate cut in September or an easing cycle starting later this month, according to a Bloomberg analysis.

"The Fed's probably the dominant force until early November, then politics really kicks in," Michael Schumacher, the global head of macro strategy at Wells Fargo Securities, told Bloomberg on Wednesday.

Schumacher said the "Trump trade" has run its course and is "about done for now."

Focus on Fed interest rate decision

To be sure, a second Trump presidency — including his administration's trade and tariff policies — would have important implications for the macroeconomy and markets, say most analysts.

But as Vishnu Varathan, Mizuho Bank's chief economist of Asia, excluding Japan, wrote earlier this week, "it is hasty to conclude prematurely what the 'Trump 2.0' will mean for markets."

In particular, concerns about inflation as a result of Trump's policies — or "Trumpflation" — are likely to play out only in the months ahead, he added.

Right now, markets are focused on when the Fed will cut interest rates, particularly since June inflation came in lower than expected, at 3.0% year-over-year — the lowest in a year.

Fed chair Jerome Powell signaled on Monday that the central bank is increasingly confident that inflation is heading to its long-term inflation target of 2%. He also said that the Fed doesn't need to wait until inflation goes all the way down to that level before cutting rates.

On Wednesday, Fed Governor Christopher Waller indicated that the central bank would cut "in the not-too-distant future."

Analysts at Swiss bank UBS said investors should not lose sight of "fundamental factors" amid the noise in the lead-up to the US presidential election in November.

"While developments in US politics may contribute to market swings in the lead-up to the election, we think investors should focus on preparing their portfolios for a lower-rate environment amid technological advances," the UBS analysts wrote on Tuesday.