Signs of Trump trade unwinding ahead of the US Election

Risk-off sentiment continued to shape market trends, with major indices in both Europe and the US starting the week on a negative note. The pan-European Stoxx 600 dropped by 0.3%, while the S&P 500 declined by 0.28%. Meanwhile, the CBOE Volatility Index (VIX), or “fear gauge,” remained at a four-month high of 22, indicating persistent hedging against political risks.

Trump Trade Positions Show Signs of Unwinding

However, the Trump Trade saw early signs of unwinding as the US dollar lost ground, and US government bond yields fell before a slight rebound. Polling data indicated Harris might have a lead in key swing states, though the race remains highly contested.

In October, investors betting on a Trump win drove demand for the US dollar, gold, and cryptocurrencies while selling off stocks and bonds. However, analysts believe the election could trigger sharp position unwinding, potentially reversing trends in financial markets.

“Since markets have largely priced in a Trump win, there’s been a substantial divergence between polling results and betting market (Polymarket) projections for the election outcome.

Most polls continue to show a neck-and-neck race, so if the election is undecided on 5 November, or if Harris wins outright, the Trump Trade could unwind sharply, leading to positive stock and bond movements but a negative dollar in the short term,” said Kelvin Wong, Senior Market Analyst at Oanda Singapore.

Michael Brown, Senior Market Analyst at Pepperstone, argues that, regardless of who wins, markets are likely to reverse as soon as results are confirmed, provided no recounts or legal issues arise. “Markets crave certainty, so any clear result would lead investors who hedged election-related risks to unwind and re-enter the market.”

Euro Faces Pressure

The US Dollar Index (DXY) initially fell but then rebounded as Monday’s polling data suggested that Democratic candidate Kamala Harris held a slight lead in swing states.

Other G10 currencies also erased early gains against the dollar, with the euro steady at its Monday open rate of 1.0876 as of 5:07 am CET. A Trump victory is likely to bolster the dollar and weigh on other currencies, while a Harris win could prompt a rapid dollar retreat.

Government Bond Sell-offs Paused

Bonds faced heavy sell-offs last month due to the Trump Trade, with yields moving inversely to bond prices. US 10-year Treasury yields slid 5 basis points to 4.30% on Monday, following a nearly four-month high last Friday.

Germany’s 10-year bond yield held steady at 2.39% after hitting 2.43%, its highest since July.

A Trump victory could drive further sell-offs as his policies might increase the budget deficit, add inflationary pressure, and force the Federal Reserve to limit rate cuts.

A Harris presidency may not produce the opposite effect, as her policies could also add to government debt and deficits, albeit potentially to a lesser extent. A divided Congress would be likely to offer the most balanced outcome for bonds, curbing excessive government spending and easing inflationary pressures.

Gold and Bitcoin Pull Back

Both gold and Bitcoin retreated from recent highs in recent trading sessions, also reflecting a potential unwinding of Trump Trade positions.

Gold is viewed as a traditional safe-haven asset, while Trump’s vision of making America “the crypto capital of the planet” helped propel Bitcoin’s rally in October.

Gold prices have been falling after reaching all-time highs last Wednesday. At 5:47am CET, gold futures were steady at $2,743 per ounce.

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Prices could decline further once election results are known. However, any post-election turmoil, such as recounts or civil unrest, could cause gold to surge.

Bitcoin, the world’s largest cryptocurrency, also fell from a recent high of $72,000 (€66,200) to just above $68,000 (€62,500) on Monday.