Less than three weeks away from the election day, the US election is becoming increasingly tense, with some corners of the financial markets experiencing volatility once again, potentially sensing the shockwaves of a potential victory by Donald Trump.
In recent weeks, assets ranging from small-cap stocks to Bitcoin have been soaring, while the Mexican peso and US Treasuries have seen some decline. Polls indicate a fierce competition between Trump and his opponent, Vice President Kamala Harris.
This trend echoes the so-called “Trump trades” seen earlier this year when Trump was ahead of President Joe Biden. However, this trend weakened gradually after Biden withdrew from the race.
According to a Reuters/Ipsos poll released on Tuesday (October 15th), Harris leads Trump by a slim margin of 45% to 42%, further reducing her lead compared to the same poll several weeks ago.
Trump is leading in online prediction markets such as PredictIt and Polymarket, with the latest forecast from Polymarket showing Trump with a significant lead of 61% to 39% over Harris.
Reported by The Wall Street Journal on Friday, Trump’s advantage on Polymarket may stem from a group of four Polymarket accounts that collectively placed about $30 million worth of cryptocurrency bets on Trump’s victory.
However, investors have issued warnings that linking investment trends to Trump’s performance can be challenging, as many trends could also be related to the surge in US employment numbers this month and the increased economic optimism following the Federal Reserve’s 50-basis-point rate cut last month.
Interactive Brokers’ Chief Strategist Steve Sosnick said, “Some of this is very likely being driven by Donald Trump’s elevated position in the prediction markets.”
However, he added that due to strong economic data, “It’s hard to tease out cause and effect, let alone different reasons.”
The biggest winner has been Trump Media & Technology Group’s stock, reflecting Trump’s fortunes tied to polling data and online prediction markets since going public earlier this year, with a more than 140% increase in the stock price since September 23rd.
Sosnick noted, “This is the trade most closely connected to the prospects of a Trump win.”
Other beneficiaries include private prison operators Geo Group and CoreCivic, whose stocks have risen by about 18% and 10% respectively this month. Trump has promised to crack down on illegal immigration, potentially increasing demand for detention centers.
Since October 10th, the Russell 2000 index, which focuses on small-cap stocks, has risen by 4%, trading near its highest levels since the end of 2021. The market expects Trump to maintain low tax rates and reduce regulations, boosting the prices of small companies, although analysts believe small companies are also benefiting from increased economic confidence among the public.
Strategists stated that in the foreign exchange market, the “Trump trades” are reflected in the rebound of the US dollar against a variety of currencies, especially the Mexican peso.
Trump’s proposed new tariffs may negatively impact the peso, leading to a 4% decline from its peak in September, while the MSCI Latin America Currency Index dropped over 3% during the same period.
Karl Schamotta, Chief Market Strategist at Toronto payment company Corpay, said, “The implied volatility of the US dollar against the peso has been rising in line with Trump’s surge in the betting markets.”
Trump mentioned on Sunday that he plans to impose tariffs as high as 200% on cars imported from Mexico.
The former president’s economic policies are seen as favorable for economic growth and may result in currency inflation, which could lead to higher bond yields (inversely related to bond prices) and a stronger dollar.
The US Dollar Index measuring the dollar against six major currencies has risen over 3% since the end of September, as investors expect a smaller rate cut. Thierry Wizman, Global FX and Rate Strategist at Macquarie Group, believes that part of this increase could be related to growing confidence in Trump’s victory.
Positioning himself as a supporter of cryptocurrencies, Trump’s boosted winning odds in the betting market appear to support the rise in Bitcoin. The world’s largest cryptocurrency has risen by 12% since October 10th, with Sean Farrell, Digital Asset Strategy Director at Fundstrat Global Advisors attributing this rebound to growing confidence in Trump’s victory.
He said, “If Trump wins reelection, the discounting associated with regulatory risks for cryptocurrencies could diminish to near zero, and investors need to consider the possibility of government strategic Bitcoin reserves, however remote.”
In the government bond market, some investors believe that the rise in Trump’s status has stimulated the increase in the 10-year term premium (measuring the compensation for holding long-term government bonds) as concerns arise over the tax cut proposals put forward by the former president that could increase the budget deficit.
The New York Fed’s indicator measuring the term premium turned positive last week for the first time since July amid generally rising bond yields.
Matt Eagan, Portfolio Manager and Head of Full Discretion Team at Loomis Sayles & Company, stated that these changes are partly due to market expectations of a Trump victory.
However, not everyone interprets these market movements as bets on Trump’s victory.
Sonu Varghese, Global Macro Strategist at Carson Group, said, “I believe the election outcome is still uncertain, with strong economic growth and Fed support being key factors.”
(Adapted from reporting by Reuters)