Two weeks
Just two weeks remain until the fate of the US election is sealed. Millions of ballots have already been cast. Despite the two candidates remaining relatively close in polling, markets have been decisive. They have been bracing and adjusting pricing for a Trump presidency. There is certainly some truth in the fact that a second Trump term is becoming more likely. However, the adjustment in pricing that we have seen is likely not just down to expectations of his outright and unquestioned success at the ballot.
Instead, the reason for the adjustment in asset values in the run up to the election is likely hedging. For better or for worse, markets expect the impact of a Trump presidency to be far more severe than a consecutive Democratic presidency. We are therefore witnessing a proportion of a prospective Trump victory being priced into markets.
Whilst Trump has spoken out during his election campaign about the challenge that the strong Dollar poses to the USA, buying the Dollar has been a defining characteristic of such hedging. Trump’s expansionary ambitions for the US economy have also helped to prop up borrowing costs perpetuating USD strength further. Despite the potential threat to equity prices from such a rotation, many US indices are still on track for record annual performances.
We have seen a lot of the position adjustments above come from the asset management and speculative portions of the market. In particular, the rotation into long dollar positions has been driven by this area of the market. This is consistent with the view that position adjustments have been deliberate. This reinforces our ability to draw causality between the market’s performance and a prospective Trump victory. As positioning aimed at a Trump victory builds, USD will become increasingly sensitive to any advance by Democratic candidate Kamala Harris in the polls.
Discussion and Analysis by Charles Porter
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