Ahead of the US election, signs of Trump’s trade positions unwinding began to surface, with analysts suggesting that a win by Kamala Harris could reverse current market trends. Risk-off sentiment continued to shape market trends at the start of the week, with major indices in Europe and the US dropping. The pan-European Stoxx 600 declined by 0.3%, while the S&P 500 fell by 0.28%. The CBOE Volatility Index (VIX), a measure of market fear, remained at a four-month high of 22, indicating continued hedging against political risks. Investors had been betting on a Trump win in October, leading to demand for the US dollar, gold, and cryptocurrencies, while selling off stocks and bonds. However, with the race remaining highly contested, the election could trigger a sharp unwinding of positions in financial markets.
The US dollar lost ground and US government bond yields fell ahead of the election, signaling early signs of unwinding of the Trump Trade. Polling data suggested that Kamala Harris might have a lead in key swing states, potentially leading to a reversal of market trends. Analysts believe that if the election remains undecided on November 5th or if Harris wins outright, the Trump Trade could unwind sharply, resulting in positive movements in stocks and bonds but a negative dollar in the short term. Markets had largely priced in a Trump win, leading to a divergence between polling results and betting market projections for the election outcome. Regardless of the winner, markets are expected to reverse as soon as results are confirmed, provided there are no recounts or legal issues arising.
The US Dollar Index (DXY) initially fell but then rebounded as polling data indicated Harris holding a slight lead in swing states. Other G10 currencies also erased early gains against the dollar, with the euro remaining steady. A Trump victory is likely to strengthen the dollar and weigh on other currencies, while a Harris win could prompt a rapid dollar retreat. Bonds faced sell-offs last month due to the Trump Trade, but they paused on Monday, with US 10-year Treasury yields sliding 5 basis points. A Trump victory could lead to further sell-offs, with his policies potentially increasing the budget deficit and inflationary pressure. A Harris presidency may produce a similar effect on government debt and deficits, but to a lesser extent. A divided Congress could offer a balanced outcome for bonds, curbing excessive government spending and inflationary pressures.
Both gold and Bitcoin pulled back in recent trading sessions, reflecting a potential unwinding of Trump Trade positions. Gold prices have been falling after reaching all-time highs, while Bitcoin also fell from a recent high. Gold is viewed as a safe-haven asset, with prices potentially declining further once the election results are known. Bitcoin, the world’s largest cryptocurrency, saw a decline from a recent high to just above $68,000. The vision of making America “the crypto capital of the planet” had helped propel Bitcoin’s rally in October. Post-election turmoil, such as recounts or civil unrest, could cause gold prices to surge, highlighting the volatility and uncertainty surrounding financial markets during this period.
In conclusion, the signs of Trump’s trade positions unwinding ahead of the US election are indicative of the uncertainty and volatility within financial markets. The risk-off sentiment continues to shape market trends, with major indices dropping as investors react to polling data and potential outcomes. The impact of the election on the US dollar, government bonds, gold, and cryptocurrencies remains uncertain, with analysts predicting a reversal of trends once results are confirmed. The potential for a swift unwinding of positions and a shift in market sentiment post-election highlights the importance of market participants staying vigilant and adaptable during these turbulent times.
