As the US election approaches, Wall Street is increasing its bets on Trump's victory. Institutions such as Goldman Sachs, JPMorgan Chase, and Deutsche Bank have pointed out that the market has a strong expectation of a Republican victory, especially in the foreign exchange market, where a Trump victory will strengthen the US dollar. Hedge fund flows show a preference for Republican themes, with positions near a two-year high, while positions in Democratic winners are being sold off. Goldman Sachs' Republican victory basket has reached a historical high, potentially exacerbating market volatility
As the US election enters a heated stage, the market seems to sense subtle changes in the wind, with "smart money" beginning to go all in on Trump's victory.
According to Goldman Sachs, the Trump Victory Index has just hit a historic high, while the Harris Index has returned to Biden's level.
JPMorgan Chase also stated that hedge funds are heavily buying into a Republican victory and selling off a Democratic victory. Republican victory trades have outperformed Democratic victory trades by about 7% in the past month.
Deutsche Bank believes that the market expectations of a Trump vs. Harris administration are mainly reflected in the foreign exchange market. If Trump wins, the US dollar will strengthen. However, the market volatility brought by a Republican sweep may be greater.
JPMorgan Chase: Hedge fund flows show strong preference for Republican themes
The market seems to be increasingly betting on the "Trump trade."
In a research report released on the 17th, JPMorgan Chase stated that hedge fund flows show a strong preference for Republican themes, with Republican winners being bought in the past few weeks, reaching near a 2-year high in positions, while Democratic winners are being sold off, with positions at multi-year lows.
Renewable energy (a clear representative of a Democratic victory) has been heavily sold off in the past few weeks, with positions becoming more bearish again.
Goldman Sachs stated that ETF flows usually remain positive after elections, but the S&P 500 index has shown minimal average gains in October of election years, and sometimes even declines.
Currently, the overall positioning level of the US stock market is higher than before, contrary to historical norms. Historical data shows that in several US elections since 2012, stock market positioning levels and the returns of the S&P 500 index tend to decline in the weeks leading up to the election.
Goldman Sachs: Republican Victory Basket Hits Historic High
The scenario of a Republican victory has become one of Goldman Sachs' preferred trades before the election. Data shows that Goldman Sachs' Republican Victory Basket has hit a historic high, while the Democratic Victory Basket has returned to Biden's level.
Vincent Mistretta, Vice President of FICC at Goldman Sachs, stated in their latest research report:
"Market positioning tends towards a Trump victory. This has been the case even before the recent increase in Trump's winning odds."
Anshul Sehgal, Co-Head of Global Rates Trading and Head of US Rates Trading at Goldman Sachs, mentioned that while there have been some pricing fluctuations in the market ahead of the upcoming election, **overall, the policy impact of this event is still unclear, leading to significant market uncertainty He pointed out that during the election period, the market is expected to fluctuate by about 20 basis points. Although this fluctuation is slightly higher, it is not enough to prompt investors to short convexity during this period.
If the Republican Party wins overwhelmingly, the market may not experience significant fluctuations on the election night. Interest rates will rise, and risk assets may temporarily rise. This is mainly due to the market's expectation that Trump's tax reduction policies will continue, and even more fiscal stimulus measures may be introduced.
If Harris wins but there is a split in Congress, the market will show a different reaction. It is expected that in this scenario, the yield curve will steepen, and risk assets will weaken.
Goldman Sachs foreign exchange analysts Mark Salib and Fernando Alvarado Aguilar stated that various clients have been buying this week, including hedge funds preparing for a potential Trump victory.
Many clients are long on the USD against the offshore RMB through risk reversals, in preparation for a Trump victory, as the likelihood of a significant depreciation of the USD against the offshore RMB is low.
Goldman Sachs stock derivatives and index trading experts Shawn Tuteja and Joseph Clyne stated that the recent stock market rally, significant drop in implied volatility, and the outperformance of the Russell 2000 index over the Nasdaq 100 index are partly due to the increasing probability of a Trump victory. However, they warned that if this trend reverses, the market may experience corresponding adjustments.
Overall, we are optimistic about the S&P 500 index continuing to rise above the 12% volatility level by the end of the year, with this volatility level likely to remain stable or show positive growth during the election period. However, in the backdrop of any sustained market rally, the beta value of spot volatility will also rise.
The "Trump trade" effect from 2016 seems to be resurfacing, driving the recent rally in the S&P 500 index mainly from regional banks, large banks, and energy sectors. The growth in this round of buying has come at the expense of a decline in the artificial intelligence sector to some extent.
UBS's Republican victory basket has also outperformed the Democratic victory basket for 14 consecutive days.
UBS trader Michael Romano wrote in a report:
"UBS's Republican vs. Democratic election hedge trade has risen by 15% so far this month, almost in a straight line, reaching a new high, indicating that the market has largely digested the expectation of a Trump victory."
Romano also added:
"This repricing is mainly driven by the banking and solar sectors, in line with the growth repricing brought about by strong employment data and corporate earnings growth, so it is unclear whether the recent market movements are influenced by the election or driven by growth."
"Although the result is the same, with bank stocks rising, cyclical/consumer/growth-oriented stocks rising, if this repricing is more driven by actual growth, then there will be more upside potential after Trump's victory. Since most of the rise is a reaction to banking performance and the consumer sector is strong, I bet that there will be more upside potential in the market after Trump's victory."
Deutsche Bank: Dollar to Strengthen if Trump Wins
Deutsche Bank analyst George Saravelos analyzed the possible reactions of various asset markets, especially the foreign exchange market.
Firstly, there is a significant difference within the Deutsche Bank team regarding the market and economic growth outcomes that the election may bring, mainly stemming from the direction of fiscal policy during government division, the extent of tariff policy implementation, and the mid-term impact of regulation, immigration, and energy policies. For example, changes in tariff policy may impact the supply chain, leading to conflicting effects on inflation and economic growth.
Secondly, the differences in fiscal policy and economic growth are most pronounced in the case of a Trump victory. Deutsche Bank believes that if Trump wins the presidency and the Republicans gain full control of Congress ("red sweep"), it will result in the largest fiscal deficit, while government division may bring the smallest deficit due to reduced tariff revenue. This also means that in the bond market, a Trump victory may trigger significant two-way volatility.
Furthermore, the report suggests that regardless of the congressional outcome, the market expectations of a Trump administration versus a Harris administration are mainly reflected in the foreign exchange market, especially the impact related to tariff policies. If Trump wins, the dollar will strengthen, while a Harris victory may lead to a dollar decline. Overall, the foreign exchange market's response to a Trump victory is more clear-cut.
Lastly, Deutsche Bank believes that if the Republicans win across the board (red sweep), the dollar will significantly strengthen, whereas a Democratic victory (blue sweep) would be most unfavorable for the dollar. However, the market volatility brought by a red sweep may be greater, especially in the foreign exchange market