Market Sentiment Remains Cautious Amid Political Uncertainty
Risk-off sentiment continued to dominate market trends as the week commenced, with major indices in both Europe and the US experiencing a downturn. The pan-European Stoxx 600 index saw a decline of 0.3%, while the S&P 500 followed suit, dropping by 0.28%. Additionally, the CBOE Volatility Index (VIX), often referred to as the “fear gauge,” maintained a four-month high of 22, reflecting ongoing hedging against political risks.
Trump Trade Positions Indicate Possible Unwinding
Signs of unwinding in the Trump Trade became apparent, as the US dollar lost traction and US government bond yields experienced a minor rebound. Polling data suggested that Vice President Kamala Harris might be leading in crucial swing states, although the electoral race remains fiercely competitive. In October, traders wagering on a Trump victory drove up demand for the US dollar, gold, and cryptocurrencies while simultaneously offloading stocks and bonds. Analysts caution that the upcoming election could trigger sharp reversals in market positions, potentially altering established financial trends.
“Since markets have largely factored in a Trump win, we are witnessing a significant divergence between polling data and predictions from betting markets, such as Polymarket,” noted Kelvin Wong, Senior Market Analyst at Oanda Singapore.
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“Most polls continue to indicate a closely contested race, so if the election results remain undecided on November 5, or if Harris emerges victorious, we could see a sharp unwinding of the Trump Trade, which might lead to positive movements in stocks and bonds but a weaker dollar in the short term,” Wong added.
Michael Brown, Senior Market Analyst at Pepperstone, echoed this sentiment, stating, “Regardless of the winner, markets are likely to reverse course as soon as the results are confirmed, assuming there are no recounts or legal challenges. Markets thrive on certainty, and a clear outcome would prompt investors who had hedged against election-related risks to unwind and re-engage with the market.”
Euro Under Pressure Amid Political Dynamics
The US Dollar Index (DXY) initially experienced a dip but later rebounded as Monday’s polling data indicated a slight edge for Democratic candidate Kamala Harris in key swing states. Other G10 currencies also reversed early gains against the dollar, with the euro remaining stable at its Monday opening rate of 1.0876 as of 5:07 am CET. A potential Trump victory is likely to strengthen the dollar and put pressure on other currencies, while a Harris win could lead to a swift retreat of the dollar.
Government Bond Sell-offs Stabilize
After enduring heavy sell-offs last month due to the Trump Trade, yields on government bonds found some stability. US 10-year Treasury yields dropped 5 basis points to 4.30% on Monday, following a nearly four-month peak reached the previous Friday. Meanwhile, Germany’s 10-year bond yield remained constant at 2.39% after climbing to 2.43%, its highest level since July.
A Trump victory could further exacerbate sell-offs, as his policies are anticipated to widen the budget deficit, increase inflationary pressures, and compel the Federal Reserve to limit interest rate reductions. Conversely, a Harris presidency may not necessarily counteract these effects, as her policies could also contribute to government debt and deficits, albeit potentially to a lesser extent. A divided Congress might present the most balanced scenario for bonds, potentially curbing excessive government spending and alleviating inflationary pressures.
Gold and Bitcoin Experience Pullbacks
Both gold and Bitcoin have retreated from their recent highs in the latest trading sessions, reflecting the potential unwinding of positions associated with the Trump Trade. Gold, traditionally regarded as a safe-haven asset, and Bitcoin, buoyed by Trump’s ambition to position America as “the crypto capital of the planet,” both saw fluctuations in their values.
Gold prices have been on a downward trajectory after reaching all-time highs last Wednesday, remaining steady at $2,743 per ounce as of 5:47 am CET. Analysts predict prices may decline further once the election results are revealed; however, any post-election turmoil, such as recounts or civil unrest, could trigger a surge in gold prices. Bitcoin, the premier cryptocurrency, also saw a decrease from a recent peak of $72,000 (€66,200) to just above $68,000 (€62,500) on Monday.
