From the US dollar to US debt to Bitcoin, the “Trump deal” has once again taken the financial market by storm

The Zhitong Finance App learned that with less than three weeks until the official election day, the huge uncertainty surrounding the financial market surrounding the US presidential election is about to come to an end. However, Wall Street traders generally feel that the “Trump deal” wave, which is closely linked to the victory of former President Donald Trump, is once again active in global financial markets.

In recent weeks, from US small-cap stocks, where stock prices have been sluggish for a long time, the prices of risk assets such as Bitcoin have been rising, while the exchange value of major assets such as the Mexican peso exchange rate and US Treasury bonds has declined somewhat due to the resurgence of the “Trump deal.”

Recent polls show that competition between Republican candidate Trump and his Democratic rival, Vice President Kamala Harris, is becoming increasingly intense, but Trump is still slightly ahead. In the period after Trump was shot and assassinated, his approval ratings were far ahead of other candidates, including Biden and Harris, but since then, the Harris approval rating has been publicly endorsed by many Democratic bosses, and the gap with Trump has continued to narrow.

These financial market trading trends echo the so-called “Trump Deal” when Trump supported and led all candidates earlier this year. At that time, Trump was far ahead of current President Joe Biden, one of the Democratic candidates, but after Biden withdrew from the election, Trump's lead gradually disappeared, and Harris once led Trump by a narrow margin of 45% to 42%. In terms of probability of winning the election, Trump is in an absolute leading position in the world's largest online prediction markets such as Predictit and Polymarket.

However, some investment institutions warned that linking these latest investment moves to Trump is more difficult than before, because the latest trends in global funding may not depend on Trump's victory, but may be closely related to this month's blowout in the US non-farm payrolls report, the expansion of retail sales exceeding expectations, and the sharp rise in optimism about the US economy's “soft landing” brought about by the Federal Reserve after cutting interest rates by 50 basis points last month.

The scope of the “Trump deal” is very broad. Wall Street traders and strategists generally agree that Trump's re-election will probably implement an extremely loose fiscal policy and larger trade protectionism. Therefore, driven by these two major policy expectations, the market choice is to bet on the strengthening of the US dollar, a sharp rise in the yield on US treasury bonds of various matures, and that the banking sector of the US stock market will benefit domestic industrial giants, and that the banking sector of the US stock market has followed the policy trend. Without exception, these assets have recently rebounded significantly following the “Trump deal” wave.

Trump Media Technology Group skyrocketed, and US small-cap stocks danced with prison stocks

“But I believe that part of the deal size must have been driven by Trump's sharp increase in leading the forecast market.” Steve Sosnick, chief strategist from Yingtou Securities, said. “However, due to the strong economic data in the US, it is difficult to completely separate cause from effect, let alone different reasons.”

One of the biggest beneficiaries of this new round of US stock gains can be described as Trump Media Technology Group (DJT.US) shares, which are firmly tied to Trump himself. The group is a social media company owned by the former US president. Since its listing this year, the fate of the group's stock price can be said to be basically consistent with Trump's own performance in public opinion polls and the US President's online prediction market.

Since September 23, Trump Media Technology Group's stock price has soared by more than 140%. Sosnick said, “This stock is the core target that benefits from Trump's chances of winning the election.”

Other major beneficiaries of the US stock market include private prison operators Geo Group (GEO.US) and CoreCivic (CXW.US). Shares of these two companies rose by about 18% and 10%, respectively, this month. Trump promised to crack down on illegal immigration, which could increase demand for internment centers across the US.

The Russell 2000 Index (.RUT), the benchmark index for US small-cap stocks, has risen about 4% since October 10, and the trading point is close to the highest level since the end of 2021. Trump's policy expectations of keeping corporate taxes low and reducing the scale of corporate regulation are compounded by expectations that the Federal Reserve will cut interest rates to jointly boost the stock prices of small businesses, although analysts generally believe that the prospects for these companies will benefit more from greater confidence in the US economic growth.

The Mexican peso was hit hard, and the dollar rebounded strongly

Some Wall Street analysts said that in the foreign exchange market, the rebound of the US dollar against a range of currencies can be seen that the “Trump deal” spread to every corner of global foreign exchange trading, especially the Mexican peso trading market. The Mexican peso is thought to be the most vulnerable to the negative effects of Trump's planned new tariffs, down about 4% from the September high. MSCI's Latin American currency index fell by more than 3% during this period.

Carl Shamota, chief market strategist at Toronto payments company Corpay, said, “The implied volatility of the dollar-peso transaction has been increasing significantly with Trump's probability of winning the election in the gaming market.”

According to information, Trump said on a program on Sunday that he would levy tariffs of up to 200% on cars imported from Mexico.

The former president's economic policy tone is seen by economists as being more beneficial to US economic growth, but it is the core catalyst for the resurgence of the inflation rate. Therefore, the core reflection of the “Trump deal” once again taking the financial market by storm is a sharp rise in US Treasury yields (treasury bond yields are inversely proportional to treasury bond prices). The main logic is that Trump's economic policy tone, such as imposing foreign trade tariffs and promoting tax cuts, is driving up inflation rate expectations.

The resurgence of the “Trump deal” has also led to the continued rise of the US dollar, which has continued to weaken since the Federal Reserve began cutting interest rates, and the US dollar has rebounded sharply against many currencies recently. Since late September, the US dollar index, which measures the strength of the US dollar against the six major currencies, has risen sharply by more than 3% because some investors expect inflation to heat up again, and the room for the Fed to cut interest rates has narrowed as a result. Thierry Wietzman, a global foreign exchange and interest rate strategist from Macquarie, wrote that new trends in foreign exchange trading and the US bond market may be closely related to the rising probability of Trump winning.

The cryptocurrency market is in a frenzy

Furthermore, Trump positioned himself as a strong supporter of cryptocurrencies in this year's US election. The sharp increase in his betting market odds was also closely related to his support for cryptocurrencies. This move won strong support for Trump from almost all cryptocurrency industry bosses and cryptocurrency fans. Trump's pro-cryptocurrency remarks have in turn greatly boosted the Bitcoin transaction price. Since October 10, the world's largest cryptocurrency by market capitalization has risen by more than 12%.

Sean Farrell, head of digital asset strategy at Fundstrat Global Advisors, attributed the Bitcoin rally to growing market confidence in Trump's victory. “If Trump succeeds in returning to the White House, the regulatory risk-driven discounts applicable to cryptocurrencies may shrink to close to zero, and investors need to consider the possibility that the government will adopt a strategic Bitcoin reserve, no matter how unlikely this is.” he said.

In the US government bond market, some investors believe that Trump's probability of winning the election ahead of Harris has spurred a sharp rise in the 10-year US bond maturity premium (which measures the risk compensation requirements for investors holding long-term government debt securities). The main reason is that they are worried that the former president's low tax proposal may increase the US government's already very high budget deficit.

The Federal Reserve Bank of New York's index measuring the maturity premium on US bonds turned positive last week for the first time since July. This change occurred when yields on US Treasury bonds of various matures generally rose. It meant that US bond investors continued to increase US bond yields, driven by high deficit expectations brought about by the rising probability of Trump winning the election. They are all demanding higher levels of risk compensation for long-term US bonds.

Matt Egan, portfolio manager and full authority team leader from Loomis, Sayles & Company, said that part of the reason for the drastic change in the value of these assets is indeed due to an increase in Trump's probability of winning the election.

However, not everyone interprets these market movements as a real money bet on Trump's victory. Sonu Walghese, a global macro strategist at Carson Group, said: “I think the election results are still very difficult to predict.” “This story is actually an expectation of stronger economic growth and a soft landing, as well as support from the Federal Reserve's interest rate cut.”