Investing.com -- Although former president Donald Trump is currently favored in prediction markets to win the upcoming election, investor enthusiasm for the so-called “Trump trades” may be nearing its peak.
These trades, which include long positions on the dollar, short US interest rates, and long US equities relative to the rest of the world (RoW), have seen significant gains in recent weeks, spurred by rising odds of a “Red Sweep.”
The US dollar has appreciated 4% since September, just below the 5% gain Citi’s FX strategists forecast in a Red Sweep scenario. Simultaneously, 10-year U.S. Treasury yields have climbed to 4.2%, approaching the predicted 4.3%.
US equities have also outperformed their international counterparts by 6% since late September. However, Citi warns that these gains have already been priced in, leaving limited near-term upside for Trump trades, while leaving room for rotation if Kamala Harris wins.
“Recent price action implies a less favorable setup for popular Trump trades heading into 5 November, with room for rotation should Harris prevail,” strategists led by David Groman said in a note.
However, Citi’s team notes this does not mean that the Trump trade is already done.
Despite outsized moves in the cross-aset space, Citi’s long and short strategies for Trump remain below mid-September levels, signaling potentially more room to run in case of a Trump win.
“Potential Trump trades that have lagged include the UK and ex-US Energy,” the bank highlighted. “Harris-linked trades that have underperformed include Europe ex UK.”
In the medium term, Citi outlines distinct strategies for both Trump and Harris win scenarios. Under a Trump victory, investors could expect a stronger dollar, higher interest rates, and heightened trade policy uncertainty, which would favor the US equities over global peers and a barbell strategy of value sectors like Energy and Financials alongside select defensive sectors.
Emerging markets, particularly those with significant international exposure, could face pressure due to Trump’s trade policies.
In contrast, a Harris win would likely lead to a weaker dollar, lower bond yields, and a tilt toward climate-friendly policies, favoring RoW equities over US equities and ex-US industrials over the Energy and Healthcare sectors.
Harris-linked trades could benefit from reduced trade tensions and a weaker dollar, with emerging markets like China and South Africa expected to outperform.