Investing.com — The continuation of the so-called “Trump trades” depends on Donald Trump winning the upcoming election, according to Citi strategists.
Markets have recently priced in more election risk, Citi notes, partly reflecting a Trump victory scenario, as demonstrated 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 look fairly priced for the binary nature of the election outcome,” strategists led by Daniel Tobon said in a Tuesday note.
“Therefore, further continuation of Trump trades now likely requires an actual Trump/red wave outcome to continue,” they added.
For the USD, strategists believe that election-related risk is close to fully priced, with only modest room for additional gains. They note that the greenback now “more fairly reflects potential Trump policies” than it did a week ago, adding 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, however, they see any potential pullbacks this week as buying opportunities.
In the rates market, Citi views recent sell-offs as having reached “a level that is close to fair,” adding that the risk-reward profile “is no longer favorable for an outright duration view.”
Still, the yield curve has remained almost unchanged, although strategists continue to see upside potential there.
Equity markets have also seen positioning shifts, particularly favoring the US over global assets.
“Our long/short strategies for Trump remain below mid-September levels, implying more room to run in a Trump win scenario,” Tobon and his team noted.
Underperformance among UK and non-US energy stocks offers further potential upside in the event of a Trump victory. Meanwhile, trades linked to Kamala Harris that have recently underperformed include European equities excluding the UK market.
Citi maintains its view that the market reaction in the event of a Harris win would likely trigger a reversal of the most common Trump trades, and thus see USD and yields trade lower, and rest-of-world (RoW) equities rebound.
“This is only truer now that markets have further priced in a Trump win,” strategists emphasized.
Credit markets, meanwhile, have shown limited movement compared to rates and FX, “as the impacts of policy shifts having more of a second-order effect on credit spreads,” the note states.