Signs of Trump trade unwinding ahead of the US Election

Risk-off sentiment continued to shape market trends, with major indices in both Europe and the US starting the week on a negative note. The pan-European Stoxx 600 dropped by 0.3%, while the S&P 500 declined by 0.28%. Meanwhile, the CBOE Volatility Index (VIX), or "fear gauge," remained at a four-month high of 22, indicating persistent hedging against political risks.

However, the Trump Trade saw early signs of unwinding as the US dollar lost ground, and US government bond yields fell before a slight rebound. Polling data indicated Harris might have a lead in key swing states, though the race remains highly contested.

In October, investors betting on a Trump win drove demand for the US dollar, gold, and cryptocurrencies while selling off stocks and bonds. However, analysts believe the election could trigger sharp position unwinding, potentially reversing trends in financial markets.

"Since markets have largely priced in a Trump win, there's been a substantial divergence between polling results and betting market (Polymarket) projections for the election outcome.

"Most polls continue to show a neck-and-neck race, so if the election is undecided on 5 November, or if Harris wins outright, the Trump Trade could unwind sharply, leading to positive stock and bond movements but a negative dollar in the short term," said Kelvin Wong, Senior Market Analyst at Oanda Singapore.

Michael Brown, Senior Market Analyst at Pepperstone, argues that, regardless of who wins, markets are likely to reverse as soon as results are confirmed, provided no recounts or legal issues arise. "Markets crave certainty, so any clear result would lead investors who hedged election-related risks to unwind and re-enter the market."

The US Dollar Index (DXY)