Analysis of "Trump Trades" in Market

According to Citi strategists, the continuation of the so-called "Trump trades" depends on Donald Trump winning the upcoming election.

Markets have recently priced in more election risk, reflecting a possible Trump victory. This is evidenced by shifts in rates, a stronger US dollar (USD), and US equities outperforming international indices.

However, with markets now better reflecting the potential for a Trump presidency, some of these trades appear to be fairly priced concerning the binary nature of the election outcome. Strategists, led by Daniel Tobon, remarked in a Tuesday note that further continuation of Trump trades likely requires an actual Trump/red wave outcome.

For the USD, strategists believe that election-related risk is close to being fully priced, with limited room for additional gains. They noted that the greenback now better reflects potential Trump policies than it did a week ago, asserting that a substantial rally will likely come only after and if Trump wins.

They caution that the risk-reward balance no longer favors USD strength without clearer signals of a Trump victory, but they see any potential pullbacks this week as buying opportunities.

In the rates market, Citi views recent sell-offs as having reached a fair level, indicating that the risk-reward profile is no longer favorable for an outright duration view. Still, the yield curve has remained nearly unchanged, with strategists seeing potential upside there.

Equity markets have also experienced positioning shifts, favoring US over global assets. Tobon and his team noted that long/short strategies for Trump remain below mid-September levels, indicating more upside potential in a Trump win scenario. They pointed out the underperformance among UK and non-US energy stocks, offering further potential upside in the event of a Trump victory. Meanwhile, trades linked to Kamala Harris that have underperformed include European equities excluding the UK market.

Citi holds the view that a market reaction to a Harris win would likely trigger a reversal of common Trump trades, resulting in a decline in USD and yields while allowing rest-of-world (RoW) equities to rebound. This belief strengthens as markets have further priced in a Trump win.

In contrast, credit markets have shown limited movement compared to rates and FX, as the impacts of policy shifts have a more second-order effect on credit spreads.