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US President Joe Biden's withdrawal from the presidential election is throwing fresh uncertainty into the markets for a second straight week.
Investors were already trying to position themselves for the so-called "Trump trade" following the failed assassination attempt on former President Donald Trump on July 13. Now, they are trying to figure out how Biden dropping out would change the game.
Analysts are gearing up for volatility.
"We have seen some rotation toward 'red' sectors and away from 'blue' ones in recent weeks as recent momentum has favored the Republican party," Mark Haefele, UBS Global Wealth Management's chief investment officer, wrote in a note on Sunday. "That could at least partially reverse in the coming days as markets parse the latest developments."
The US dollar — which is expected to gain under a potential Trump presidency — weakened on Monday. This helped dollar-denominated spot gold rise 0.2% to above $2,400 an ounce.
Markets at large were relatively calm following Biden's withdrawal after the Trump trade gripped sentiment last week. S&P 500 stock futures were 0.2% at 1:33 a.m. ET, while Nasdaq-100 futures were up 0.4%.
Yields for 10-year US Treasury yields were 1.7 basis points lower, "which may reflect a little less risk of even more fiscal spending," Jim Reid, a multi-asset research strategist at Deutsche Bank, wrote on Monday.
Both EUROSTOXX 50 and FTSE futures were slightly higher.
Kyle Rodda, a senior market analyst at trading platform Capital.com, told Business Insider that Biden's withdrawal from the race also removes a layer of uncertainty in the market.
"This move probably improves the chances of the Democrats to win the presidency," said Rodda, referring to Biden's decision not to seek a second term.
Gold, as a safe haven asset, is likely to come under pressure should Harris' chances improve, since it reduces the risk of fallout from Trump's hawkish foreign policy and massive deficit spending, Chris Weston, the head of research at Australian onine broker Pepperstone, wrote in a note.
Investors are still focusing on whether the Democratic Party will nominate Kamala Harris as its presidential candidate.
"There is a small risk that Harris' presumptive nomination is met with resistance within the Democratic Party and causes internal divisions, leading to calls for another candidate," said Rodda. "That would reignite the volatility we saw at the end of last week."
The CBOE Volatility Index rose 33% last week following the assassination attempt on Trump, reflecting market jitters over the political landscape. The index was not yet open for trade on Monday as of the time this article was published.
Analysts don't expect the Democrats' fiscal and trade policy agenda to shift much if they nominate Harris.
"The Dems will want to position her as a continuity candidate," said Rodda.
"Biden's withdrawal resets the contest. However, to the extent that Harris is nominated to succeed Biden as the Democratic standard-bearer, we believe the dynamics of the election will not change as much as one might expect," said UBS' Haefele.
"The American electorate is highly polarized and most of Biden's supporters will be reluctant to abandon the party's nominee," he added.
Despite the uncertainty, UBS advises investors to not forget fundamentals matter too — maybe even more so than politics.
"Investors should remember that US political outcomes are far from the largest driver of financial market returns, or even sector performance," wrote Haefele.
The Swiss bank is advising investors to not alter their strategies too dramatically based on political expectations.
"Economic data and Fed rate cut expectations remain at least as important," Haefele added.
