Financial and betting markets may have started to price a Trump victory, but the election remains to most watchers too close to call. Polling data in key swing states is within the margin for error. 

Trump policy would likely have a larger market impact than Harris – a) she represents the status quo and b) it’s unlikely the Democrats can secure Congress.  

The focus of the Trump trade is fiscal expansion and trade (tariffs), which would affect inflation expectations (higher) and tend to exert a strong influence in Treasury and FX markets, but also see risk-on in equity markets with US cyclicals favoured over RoW. We would also look at tax cuts as part of a Trump economic policy, with a possible flirtation with ending income tax altogether. The Harris trade would tend to focus on unwinding elements of the pre-election Trump trade, the likely impact of higher taxes on earnings and reassertion of wider macro forces. 

Polls: The election is too close to call 

But we will try anyway – the market has clearly moved towards a Trump victory. Stan Druckenmiller says the market appears “very convinced Trump is going to win”. Trump has benefitted from an ‘October surprise’. 

Fig 1 National Polls 

Here is RealClearPolitics showing why the market is leaning towards a Trump victory. In recent days he has overtaken Harris on the popular vote. This is not reflected by all pollsters (FiveThirtyEight, for example, still shows Harris +1.4pts on the popular vote), but it’s an indication of the trend and momentum. A true October surprise moment. 

Fig 2: Historical trends favour Trump this time 

Source: RealClearPolitics 

Fig 3: Top Battlegrounds 

Source: RealClearPolitics 

Swing State Polls via FiveThirtyEight (Oct 29th) 

Pennsylvania: Trump +0.3 

Michigan: Harris +0.5 

North Carolina: Trump +1.3 

Nevada: Trump +0.2 

Wisconsin: Even 

Georgia: Trump +1.6 

Arizona: Trump +1.9 

Betting Markets: Trump Winning 

I question the degree to which we can rely on betting markets as a prediction of voting intention. For example, the oft-cited Polymarket is an offshore market where odds can be affected by a few whales. The argument that ‘real money is at stake’ can be countered by the fact that it’s only being driven by the opinion of a relatively small number of disinterested individuals.  

Fig 4 Polymarket latest odds clearlyfavour to a Trump win 

Contested Result? 

The biggest uncertainty facing the market is not whether it’s Trump or Harris, but if it ends up as a genuinely contested result. It took days to declare Biden officially the winner last time – and Trump contested the result almost until the January inauguration. The risk is once again that neither side is willing to concede and we end up in a high-stakes legal cat-and-mouse, which could in theory at least last weeks. This outcome has the largest potential for a negative risk catalyst in the market.  

We expect things to be volatile on the night. Declarations or rumours around key swing states like Pennsylvania will be particularly important and algo-driven markets could be especially sensitive to headline risk. 

Because the polls remain so close, the election creates a great deal of uncertainty with traders trying to price for a binary outcome. Key policies, particularly around trade, tariffs and the outlook for the US debt, will be greatly affected by the outcome and so the results will drive price action. 

The greatest risk would be if the election result is bitterly contested afterwards by the ‘losing’ party – this is probably the main tail risk for markets to consider. 

Markets are not very good at pricing for extreme events that come with a low chance of happening; high-impact, low-probability (HILP) events. Pricing the extreme left tail is virtually impossible; investors just tend to cross their fingers and hope it doesn’t happen. Eg war with Ukraine was never priced by markets. Nor was a pandemic. A US civil war is not being priced for obvious reasons, but a quarter of Americans fear this outcome after the November 5th vote. There is clearly a lot of unease about what happens after the vote and yet this is not currently being reflected in financial markets. Two assassination attempts on Donald Trump during the campaign however point to the threat of political violence being extremely real. The counting of the votes may only be the start of a new process that financial markets will struggle to understand. 

Policy implications and market reactions 

Deficits: only going up 

Long gold has been the trade of the last year: +50% since October 7th 2023; Long BTC +65% or so this year. Both are seen as proxy trades for higher deficits + inflation. 

Legendary investor Stan Druckenmiller on “Bidenomics” and the current government deficit: “If I was a professor, I’d give him an F. Treasury is still spending like we’re in a depression. We have 7% budget deficits at full employment… it’s unheard of.” 

Where will it end? A reckoning will come. “The question is after this election will we have a Minsky moment here in the United States and U.S. debt markets?” Paul Tudor Jones asked in an interview with CNBC last week. “Will we have a Minsky moment where all of a sudden there’s a point of recognition that what they’re talking about is fiscally impossible, financially impossible?”     

The economic policies of both candidates would raise the budget deficit. The US national debt stands at about $28 trillion, roughly equivalent to 100% of GDP. The Congressional Budget Office (CBO) projects that the figure will top $51 trillion, or 122% of GDP, within the next decade. 

Billionaires are betting against US government bonds, with yields climbing not just on the solid US economic data but also markets pricing in a ‘red wave’ result. Whoever wins the election, the deficit will be the loser. 

Trump has endorsed several tax-related policy proposals, such as extending the expiring provisions of the 2017 Tax Cuts and Jobs Act (TCJA) and recommends additional reductions in the corporate tax rate to 15 percent.  Trump also favours eliminating income taxes on Social Security benefits.  

The Penn folks reckon this would increase primary deficits by $5.8 trillion over the next 10 years on a conventional basis and by $4.1 trillion on a dynamic basis that includes economic feedback effects. GDP would rise a bit to start but eventually falls relative to current law, in their model, falling by 0.4 percent in 2034 and by 2.1 percent in 30 years. Low, middle, and high-income households in 2026 and 2034 all fare better.  

Harris’s tax and spending proposals would increase primary deficits by $1.2 trillion over the next 10 years on a conventional basis and by $2.0 trillion on a dynamic basis that includes a reduction in economic activity, whilst GDP falls by 1.3 percent by 2034 and by 4 percent within 30 years. We talked about Trump and Harris economic plans in a recent episode of Overleveraged. 

Although both candidates would, according to the analysis, raise the deficit, we still get a binary outcome that is creating volatility and asymmetric risks, which is showing up in the MOVE index of Treasury market volatility. MOVE indicates the range of outcomes for this election is much wider than all other elections since 1988. 

A Republican clean sweep scenario will likely raise the Federal deficit more than other outcomes. 

Trade and Tariffs 

“To me, the most beautiful word in the dictionary is ‘tariff.’ It’s my favourite word.” – Donald Trump. 

Equity market performance would be affected by the election outcome, but a lot will depend on whether Harris or Trump have the votes in Congress to pass key tax legislation. BofA has done sector-by-sector analysis and says the Harris proposal to raise the corporate tax rate from 21% to 28% would be a 5% hit to EPS, while Trump’s proposal to lower the corporate tax rate from 21% to 15% would boost EPS by 4%.” 

Trade wars would be another considerable lever on equity markets – in his first term emerging markets and Europe (ex-UK) were obvious underperformers.  

FX markets will be sensitive to the election risk. Recent USD strength may reflect some Trump trade repricing, however it’s also true that we have seen some considerable recalibration for central banks. The ECB has swung behind a more aggressive easing cycle; the UK has just seen inflation dip sharply (which pushed gilt yields and sterling sharply lower), and Japan is eyeing political difficulties and slower inflation. This means there could be further room for the dollar to rally in the wake of a Trump victory/Republican clean sweep. 

EM markets have been somewhat shielded by the recent China stimulus efforts, but that could mean a deeper reaction should Trump win. Currencies to watch include MXN, BRL, ZAR, PLN, NZD and HUF – these suffered the biggest losses in the days immediately after the Trump victory in 2016. CNY, EUR, TWD and THB would also be a clear proxy trade for tariffs. All will be sensitive to the result and kneejerk on the night of the election even if the final result is not fully decided. Watch those swing states for gapping in MXN and CNY in the EM space, whilst AUD and NZD are most exposed among G10 crosses. 

Election Scenarios 

Republican Clean Sweep 

Here is Trump Max: On policy, a Republican ‘trifecta’ of securing the White House, Senate and House would result in repeal of some elements of the Inflation Reduction Act, more China tariffs, lower regulation, lower corporate taxes, extension of individual tax cuts and be broadly reflationary for the US economy. Indeed, Trump has flirted with ending income tax completely, using tariffs alone to fund the government. Although this seems unlikely, as the Republican-dominated Congress would be hard pressed to back it, I can imagine a scenario where an unfettered president Trump takes this radical, ultimate tax cut. 

This Republican clean sweep scenario ought to favour short Treasuries (The PTJ/Druckenmiller position), with yields likely rising and the curve steepening. The 10yr Treasury yield could break 5% by the end of the year. The recent decoupling in the 10yr from oil points to a clear Trump trade at work.  

Indeed, the 10yr yield has risen about 70bps since the Fed cut by 50bps on September 18th. Whilst this is not uncommon, and does also reflect renewed confidence in the strength of the US economy after strong payrolls numbers, it also reflects a front-run of an expected Trump win – in 2016 the 10yr yield rose 50bps in the week after the election. 

Industrials, financials, energy and crypto would be among the most favoured sectors and US cyclicals doing well.  

Anything exposed to China tariffs would likely be sold, with small caps and US MAGA domestic plays bought. 

Trump President, Split Congress 

This would be Trump-lite – tariffs, lower taxes, but with greater uncertainty around ability to deliver risk-positive cuts. I think it would be reflationary but not to the extent that a cleaner Republican trifecta would. The 10yr Treasury yield would climb, at least 4.5% and you would be looking at the same sectors as the clean sweep scenario. 

Harris President, Split Congress 

This outcome – with the GOP taking the Senate, would mean limited changes to the status quo. You could anticipate a lacklustre risk-on play into the year end – unclenching post election, but also unwinding some elements of the Trump trade, notably around tariffs and FX. 

Democrat Clean Sweep 

The consensus has been that this is not going to happen (state polls showed Republicans are highly likely to take the Senate) – but the races for the upper house could be closer than markets seem to presume.  

In a ‘blue sweep’ the more reforming and ‘progressive’ wing of the party to be emboldened. Probably this would tend to be negative for equity markets on expectations for more regulations and higher taxes.  

Neil Wilson

Chief Market Analyst at Finalto

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