Sudden changes in the market! Is the “Trump deal” really taking the market by storm again?

As the US presidential election gets closer, some corners of the financial market have once again fluctuated because Trump may re-enter the White House.

In recent weeks, the prices of assets from small-cap stocks to Bitcoin have risen one after another, while Mexican pesos and US Treasury bonds have declined. Polls show that the competition between Republican candidate Trump and his Democratic rival, current US Vice President Harris, is very intense.

These trends echo the so-called “Trump Deals” that occurred earlier this year when Trump was ahead of current US President Joe Biden in presidential nominations, but after Biden withdrew, these deals all eventually subsided.

Harris is ahead of Trump by a narrow margin of 45% to 42%, according to a poll released by Reuters/Ipsos on Tuesday. This gap is smaller than the gap shown in the same poll a few weeks ago.

Trump has taken the lead in online prediction markets such as PredictIT and PolyMarket. Polymarket recently even predicted that he would win by 61% to 39%.

According to US media reports on Friday, Trump's rise in votes on Polymarket may have stemmed from four Polymarket accounts, which together spent about $30 million in cryptocurrency betting that he will win. Polymarket has yet to immediately comment on the matter.

However, investors warned that it is more difficult to link market trends to Trump this time, as many of these trends are also related to this month's strong US employment data and rising economic optimism after the Federal Reserve cut interest rates by 50 basis points last month.

Steve Sosnick, chief strategist at Interactive Brokers, said, “Some of this may definitely be driven by Trump's rising position in the forecasting market.” However, he also said, “It's hard to separate causation, let alone differentiate between different causes.”

The biggest increase was in the shares of Trump Media and Technology Group. Since its listing this year, the stock price of this media company, which was founded by the former president, has generally been in line with Trump's trends in the polls and online prediction markets. The stock is up more than 140% since September 23. Sosnick said, “This is the deal most influenced by Trump's election prospects.”

The Russell 2000 Index, which is dominated by small-cap stocks, has risen 4% since October 10 and is close to its highest level since the end of 2021. Markets expect Trump to continue to maintain low tax rates and reduce regulation, which has boosted the trend of small company stocks, although analysts believe these companies are also benefiting from increased confidence in the economy.

The strategist said that in the foreign exchange market, Trump's deal was reflected in the strong rebound of the US dollar against a range of currencies, particularly the Mexican peso.

The Mexican peso is considered vulnerable to new tariffs planned by Trump, and its exchange rate fell 4% from the September high. The MSCI Latin American Currency Index fell by more than 3% over the same period.

Karl Schamotta, chief market strategist at Toronto payments company Corpay, said, “The implied volatility of the dollar against the peso has been rising as Trump's votes in the gaming market have increased.”

Trump said on Sunday that he would impose tariffs of up to 200% on cars imported from Mexico.

The former US president's economic policy is thought to be beneficial to economic growth and drive inflation. Both factors may lead to higher US bond yields (contrary to the trend in bond prices) and a stronger dollar.

The US dollar index, which measures the exchange rate of the US dollar against the six major currencies, has risen by more than 3% since the end of September, as investors expect the Federal Reserve to cut interest rates even less. Thierry Wizman, Macquarie's global forex and interest rate strategist, wrote that part of the dollar's rise may be related to increased confidence in Trump's victory.

Trump's improved betting market win rate, and he's positioning himself as a pro-cryptocurrency candidate, which appears to be boosting the price of Bitcoin. The world's largest cryptocurrency has risen 12% since October 10, and Sean Farrell, head of digital asset strategy at Fundstrat Global Advisors, attributed this rise to increased confidence in Trump's victory.

He said, “If Trump is re-elected, the government's regulatory risk-driven discount on cryptocurrencies may drop to close to zero, and investors need to factor in the price the possibility that the US government will establish a strategic Bitcoin reserve, no matter how big or small.”

In the government bond market, some investors believe that Trump's rise in status has led to a rise in the 10-year forward premium (a measure of how much compensation investors need to pay for holding long-term government debt securities), and they are concerned that the former president's proposed tax cuts may increase the budget deficit.

The New York Federal Reserve's index for measuring forward premiums turned positive last week for the first time since July. This change comes against the backdrop of a general rise in US Treasury yields.

Matt Eagan, portfolio manager and head of the discretionary team at Loomis, Sayles & Company, said part of the reason was that the market expected Trump to win.

However, not everyone interprets these market trends as a bet on Trump's victory.

Sonu Varghese, a global macro strategist at Carson Group, said, “I think this election is still basically evenly matched. The real situation is that economic growth is strong, and the Federal Reserve is supporting the market.”