Trump TACO trade returns as markets call US President’s bluff
The TACO trade was born last April after US President Donald Trump quickly folded on his aggressive tariff plans and it has proved profitable for investors ever since.
Traders have detected a pattern emerging across in second-term of US President Donald Trump: he watches share markets sink as a consequence of tariff threats or war in the Middle East, before he relents, does a deal, and sells his policy as a tremendous victory.
This financial bet that Mr Trump always backs down is known as the TACO — Trump Always Chickens Out — trade.
On Tuesday, the trade operated when the S&P/ASX 200 jumped 1.6 per cent and traders bought stocks in anticipation of Mr Trump backing out of the war after oil prices surged 30 per cent to top $US118 a barrel ($167) on Monday.
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By continuing you agree to our Terms and Privacy Policy.“We could call it (the Iran war) a tremendous success right now, or we could go further,” Mr Trump said on Tuesday.
Earlier he told CNBC “the war is very complete” in a retreat from last week’s comments to expect a four to five-week conflict.
The TACO’s arrival and Mr Trump’s shift in tone is almost certainly linked to the surge in oil prices that threatens to anger his MAGA base known for an aversion to electric vehicles and overseas wars.
“Trump sees the share market as a daily poll of his popularity and he knows how to play the markets,” said Tony Sycamore, a strategist at IG Markets. “The mid-term elections are in November and he can’t afford to have stocks in freefall, his approval rating is already under pressure. So we might get another 12-day war, where he walks away around the end of this week to declare a victory.”
Eyes on Strait of Hormuz
Analysts remain uncertain as to the direction of Brent oil prices that fell back to around $US90 a barrel on Tuesday. They are watching the Strait of Hormuz between Iran and Oman that ships 20 per cent of the world’s daily oil and gas supplies.
As of Monday the strait remained closed and even if a tanker’s crew were prepared to risk an attack by transiting it, the world’s insurance businesses are not prepared to underwrite the risk of a sinking and the cost of billions of dollars of lost.
In response the US Development Finance Corp scrambled to offer a $US20 billion reinsurance facility to underwriters to encourage them to offer insurance, but to no avail.
By Tuesday morning, news reports that a couple of tankers were transiting as tensions de-escalated, stoked the TACO trade further.
Mr Trump also took to social media platform, Truth Social, near Tuesday lunchtime to warn: “If Iran does anything that stops the flow of Oil within the Strait of Hormuz, they will be hit by the United States of America TWENTY TIMES HARDER.”
Mr Sycamore said hedge funds and traders will now scramble for minute-by-minute updates about shipping in the Strait as a key driver of the TACO trade’s emergence.
“The fact that a couple of ships are getting through the Strait is certainly a huge development,” he said. “More might chance their hands. Yesterday it was bleak, Trump wanted a full surrender and Iran’s new supreme leader signalled hard-line continuity. But now we’ve seen a half-blink from Trump, is it a full TACO? No, I don’t think so, but the tone’s softened, so it sets the stage for a TACO.”
Bond vigilantes vote down conflict
It’s not just the share market President Trump watches as a gauge of his popularity. Stocks and US government bonds immediately plunged after his April 2, Liberation Day, announcement that the US would impose major tariffs on trade partners
Within a week of Liberation Day the TACO trade was born on April 9 when the President conceded “people were getting a little queasy” about his tariff plans and announced significant delays.
In particular, the almighty US bond market forced the US President to back down. By April 9, the yield on US 30-year government bonds topped 5 per cent as the nation’s debt burden threatened to spiral out of control.
Moreover, Mr Trump himself regularly talks about the importance of low interest rates to create a hot economy. This is part of the basic economic philosophy of a construction billionaire that believes cheap debt allows you to create great outcomes.
Therefore powerful bond traders — as the holders of the interest rate keys — are likely to drive the TACO trade as much as any other part of capital markets.
As an example, the yield on US 30-year debt fell back 13 basis points to 4.70 per cent on Tuesday morning, after rising to 4.83 per cent on Monday as long-dated interest rate traders signalled their displeasure at the inflationary and fiscal damage from the war.
Mr Trump’s walk back will also come as a relief to the Australian Government. The yield on Canberra’s 10-year government bond hit 5 per cent for the first time since July, 2011, on Monday, before falling back to 4.84 per cent on Tuesday.
The brief-but-symbolic move above 5 per cent signals that local bond investors are seriously worried about higher-for-longer inflation in Australia. The Reserve Bank is also braced for more inflationary damage as it sticks to forecasts for cash rates of 4.2 per cent or more from December 2026 through June 2028.
