As the U.S. election reaches a fever pitch, the market seems to be sensing a subtle shift in sentiment, with "smart money" beginning to go all in on a Trump victory.

According to Goldman Sachs, the Trump Victory Index has just hit a record high, while the Harris Index has returned to Biden levels. JPMorgan also notes that hedge funds are heavily buying into a Republican win while selling off bets on a Democratic victory. In the past month, trades betting on a Republican win have outperformed those betting on a Democratic win by about 7%.

Data shows that Goldman Sachs' "Republican Victory Basket" has reached a new high, while the "Democratic Victory Basket" has fallen back to levels seen when President Biden withdrew from the race. Goldman Sachs currency analysts Mark Salib and Fernando Alvarado Aguilar reported that a wide range of clients, including hedge funds, are preparing for the possibility of a Trump victory, with many making purchases this week.

UBS' "Republican Victory Basket" has also outperformed its "Democratic Victory Basket," closing higher for 14 consecutive days. UBS trader Michael Romano noted in a report that UBS’ Republican vs. Democratic election hedge trade has surged 15% so far this month, almost rising in a straight line to a new high, indicating that the market has largely priced in expectations of a Trump win.

JPMorgan recently released a report showing that hedge fund flows exhibit a strong preference for Republican-themed assets. Renewable energy, a clear representative of a Democratic win, has been heavily sold off in recent weeks, and positions have turned increasingly bearish again.

Deutsche Bank analyst George Saravelos believes the key difference in market expectations between a Trump and Harris administration lies primarily in the foreign exchange market, especially in relation to tariff policy. A Trump victory would likely strengthen the U.S. dollar, whereas a Harris win could lead to a dollar decline. Overall, the currency market's response to a Trump victory appears more definitive.

Deutsche Bank also suggests that the difference in market expectations between Trump and Harris mainly impacts the foreign exchange market. A Trump victory would likely lead to a stronger dollar. However, a Republican sweep could bring about greater market volatility.

The resilience of U.S. consumer spending and employment markets reinforces the “soft landing” scenario, further reducing the likelihood of a significant Federal Reserve rate cut. In the short term, this could lead to upward pressure on both the dollar and U.S. Treasury yields. Cautious policy expectations may weigh on gold prices. However, the approaching U.S. election is increasing market impact. Particularly, as polls show Trump taking the lead again, the market is shifting towards the "Trump trade." For gold, loose monetary policy could reignite rapid inflation, which would be bullish for gold, though a strong dollar might limit its upside.

Additionally, recent geopolitical tensions in the Middle East and between North and South Korea have provided some support for gold prices. In the longer term, gold’s inflation-hedging and safe-haven attributes will be key drivers of its price rise, with long-term strategies focusing on buying on dips.

As the U.S. election approaches, its impact on the markets is becoming more pronounced. Recent U.S. election polls show Trump catching up to Harris. Wall Street giants such as Goldman Sachs, JPMorgan, and Deutsche Bank have all voiced their positions, with Wall Street fully betting on the "Trump trade."

On the Federal Reserve front, after the Fed’s rate cut in September, the narrative of a “recession trade” and “rate cut trade” has cooled off somewhat. Recently, several Fed officials have voiced support for gradual rate cuts, lowering market expectations for further cuts next year. On October 21, U.S. Treasury yields surged, with long-term rates rising the most. The 10-year Treasury yield has returned to around 4.2%, driving real interest rates significantly higher to 1.88%, the highest since August of this year.

Follow us

Find us on Twitter, Instagram, YouTube, and TikTok for frequent updates on all things investing.

Have a financial topic you would like to discuss? Head over to the uSMART Community to share your thoughts and insights about the market! Click the picture below to download and explore uSMART app！

Important Notice and Disclaimer:

We have based this article on our internal research and information available to the public from sources we believe to be reliable. While we have taken all reasonable care in preparing this article, we do not represent the information contained in this article is accurate or complete and we accept no responsibility for errors of fact or for any opinion expressed in this article. Opinions, projections and estimates reflect our assessments as of the article date and are subject to change. We have no obligation to notify you or anyone of any such change. You must make your own independent judgment with respect to any matter contained in this article. Neither we or our respective directors, officers or employees will be responsible for any losses or damages which any person may suffer or incur as a result of relying upon anything stated or omitted from this article.

This document should not be construed in any jurisdiction as constituting an offer, solicitation, recommendation, inducement, endorsement, opinion, or guarantee to purchase, sell, or trade any securities, financial products, or instruments or to engage in any investment or any transaction of any kind, nor is there any intention to solicit or invite the purchase or sale of any securities.

The value of these securities and the income from them may fall or rise. Your investment is subject to investment risk, including loss of income and capital invested. Past performance figures as well as any projection or forecast used in this article is not indicative of its future performance.

This advertisement has not been reviewed by the Monetary Authority of Singapore