Investors were on edge as Americans headed to the polls on Tuesday, reflecting the uncertainty surrounding the outcome of what has been a dramatic and unpredictable US election cycle.
Traders are keeping a sharp focus on the US as the results could potentially sway stock prices, bonds, and other assets already impacted by months of speculation. With uncertainty still hanging over the final result, analysts and investors alike are bracing for a volatile week ahead.
With the presidential race seemingly heading towards a nail-biting conclusion, market analysts predict that financial markets are set for a period of heightened volatility. Deutsche Bank analysts warned that this could be one of the closest races in American history. “If it’s close, stand by for a long few days,” said Jim Reid, a strategist at the bank.
According to Saxo Bank, investor sentiment has been increasingly cautious in recent days. The bank’s analysis points to a spike in the put/call ratio, which recently hit 1.61, the highest level since 5 August. That period saw a surge in market volatility following an unwind of the Japanese yen (JPY) carry trades, and the elevated ratio now signals that investors are hedging their bets more aggressively. In simple terms, more market participants are trading put options (which profit from price declines) than calls, suggesting heightened concern over potential downside risks in the market.
The betting markets have tilted in favour of Donald Trump, despite his trailing position in the opinion polls, fuelling what Wall Street has dubbed the “Trump trade.” This refers to the market dynamics driven by expectations of Trump’s policies, particularly in areas such as tariffs, immigration, foreign aid, and cryptocurrency regulation. These policies have already started to influence trends across asset classes, with the dollar, gold, silver, and bitcoin strengthening, while stock markets have faced increased pressure.
Economists believe that Trump’s proposed policies, including a 60% tariff on Chinese goods and a 10% tariff on imports from other countries, could drive up domestic prices. This would likely prompt the Federal Reserve to raise interest rates, thereby putting additional pressure on equities and other currencies.
Matthew Ryan, head of market strategy at Ebury, pointed out that a Trump win would likely be bullish for the dollar, particularly if the Republicans secure a clean sweep of Congress. “Investors would immediately price in lower US taxes, higher Federal Reserve rates, greater protectionism, and elevated geopolitical risk,” Ryan said.
On the other hand, he noted, a win for Kamala Harris would likely see more contained currency movements, with a sharp sell-off in the dollar and a relief rally for emerging market currencies.
Ryan also warned of the possibility of a divided Congress, which could make it difficult for either candidate to push their fiscal proposals through. However, Trump would have little difficulty enacting his tariff plans, which could result in a significant depreciation of Asian currencies closely linked to China, particularly in countries like Japan and South Korea.
Brad Bechtel, an analyst at Jefferies, noted that while the election results will bring short-term volatility, the ultimate outcome is still unclear. “I don’t think anyone has any idea what will transpire, although a tremendous amount of ink has been spilled trying to strategize around it,” Bechtel said. “More likely than not, it will take a few days to clear all the volatility, with things too close to call.”
Markets are particularly concerned about the risk of a contested result, which could add to the market turbulence. “The biggest uncertainty facing the market is not whether it’s Trump or Harris, but if it ends up as a genuinely contested result — one side fails to back down or accept defeat,” said Neil Wilson, chief market analyst at Finalto.
“The risk is once again that neither side is willing to concede and we end up in legal mazes, which could last weeks. This outcome has the largest potential for a negative risk catalyst in the market.”
In the UK, FTSE (^FTSE) investors have been hedging their bets, with both defensive sectors, such as utilities and tobacco, and cyclical sectors, including mining stocks, seeing increased demand this session.
Russ Mould, investment director at AJ Bell, suggested that these moves reflect investors preparing for potential market turbulence. “A contested election result could cause volatility, which would theoretically see defensive stocks providing some portfolio ballast,” Mould said.
“On the other hand, a clear winner quickly after voting ends could provide some relief and allow markets to continue their rally.”
Some analysts caution that a Trump re-election could push the euro toward parity with the dollar. In addition, a potential renewal of the EU-US trade conflict could lead to fresh currency adjustments, with the European Central Bank possibly accelerating rate cuts, which would likely weaken the euro further.
On the other hand, a Harris win may not offer substantial relief for markets. As Chris Beauchamp, chief market analyst at IG, noted, Harris is likely to continue many of the policies from the previous Biden administration, such as the Inflation Reduction Act (IRA), which has protectionist undertones. The IRA’s hundreds of billions of dollars in climate and energy policy spending, including tax credits for US electric vehicle makers, could disadvantage European competitors.
“A Harris win would likely create a ‘status quo’ environment for markets to stabilise quickly, with investors shifting focus back to Federal Reserve actions and broader economic fundamentals,” Beauchamp said.
Under a Trump administration, certain sectors could see a boost, particularly oil and gas. As a supporter of fossil fuels, Trump is expected to ease emissions regulations, creating favourable conditions for oil and gas companies like Shell (SHEL.L) and BP (BP.L). “Trump is supportive of fossil fuels and less so for renewables,” noted Michael Rodda, an analyst at Capital.com.
Saxo Bank’s latest analysis showed that hedge funds have been aggressively buying the US dollar, particularly by selling off the euro (EUR), Japanese yen, and Canadian dollar (CAD). This positioning has lifted the dollar to a 3.5-month high, as traders expect a potential “red sweep” that could lead to higher government spending, increased inflation fears, and delayed rate cuts by the Federal Reserve. Saxo analysts noted that, in this environment, the dollar is becoming increasingly attractive due to the widening interest rate differential.
Meanwhile, commodity markets have been under pressure, with broad selling across crude oil, gas oil, gold, silver, and soybeans. “Speculators’ demand for USD picked up additional momentum ahead of the US election, with traders positioning themselves for the risk of a red sweep,” Saxo analysts said.
Despite the immediate volatility, many analysts agree that the US election’s long-term impact on markets will be relatively limited. Lindsay James, investment strategist at Quilter Investors, pointed out that the US election, while globally significant, has historically had minimal effect on long-term market returns.
“Markets tend to be resilient and adapt to new administrations, regardless of the party in power,” James said. “Over the long term, factors such as corporate earnings, economic growth, and interest rates play a more substantial role in determining market performance.”
Regardless of who wins, the policies of the next president will be instrumental in shaping market trends.
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