As votes pile up in his favour, Trump trade erupts across markets

For those on Wall Street who’ve been riding the Trump Trade, it was a moment of vindication, even if it ultimately proves fleeting.

Donald Trump quickly put his stamp on financial markets Tuesday night. As the votes piled up in key swing states in his favor, leaving him on the cusp of returning to the White House, all the tried-and-true Trump Trade plays erupted.

US stocks surged, with S&P futures climbing 1.4%; the dollar posted its biggest gain against major currencies since 2020; Treasury bonds tumbled, sending benchmark yields up more than 0.1 percentage point; and Bitcoin soared to a record.

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All the votes aren’t in yet but the moves send a clear signal that investors expect a second Trump administration to look a lot like his first one: a steady stream of policies (tax cuts, deregulation, tariffs) that will simultaneously stoke economic growth, corporate profits and inflation.

For those on Wall Street who’ve been riding the Trump Trade, it was a moment of vindication, even if it ultimately proves fleeting.

“If you had the Trump trade on for the last six weeks, it’s been outstanding,” said Ed Al-Hussainy, a rates strategist at Columbia Threadneedle Investment. “The question is these winning runs don’t last forever and is this a good time to take profits.”

While the message from investors is broadly positive, there is also a stern warning in the market gyrations.

The surge in Treasury yields underscores concerns that Trump’s policies will only further swell a bloated budget deficit and reignite an inflation spiral that policymakers were just finally quelling in the wake of the pandemic. In the parlance of Wall Street, this is the bond vigilantes exerting pressure on leaders in Washington to keep spending in check.

“Vigilantes are in full control. Panic is starting to set in, the coiling we expected is happening,” said NatAlliance Securities’ Andrew Brenner.

Heading into the vote, fund managers remained all-in on stocks even after gains of 23% in the S&P 500 already in 2024, poised for the best election-year return in nine decades. Asset managers “have been running record net long positions in US equity index futures,” according to a note Tuesday from Morgan Stanley’s quantitative and derivatives strategies desk.

Long exposure to the S&P 500, Nasdaq 100 and Russell 2000 built to around $400 billion, almost double the level of two years ago, while total shorts fell below $100 billion for the first time since 2015. Allocations among retail investors have also been rising, the note said.

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In currencies, hedge funds and other speculative traders held some $17.8 billion in bullish dollar positions, according to the most recent Commodity Futures Trading Commission data.

“The bigger the emphasis on tax cuts and deregulation in terms of near-term agenda, the more positive this is likely to be for risk assets,” George Saravelos, global head of FX research at Deutsche Bank AG, wrote in a note.

One of the biggest gainers was Bitcoin, which advanced more than 8%, adding to a surge seen in the weeks leading up to the election as investors wagered Trump, who has embraced digital assets, would win the White house.

For Columbia Threadneedle’s Al-Hussainy, the question now is whether the moves can extend.

“I expect to see some profit taking on the Trump trade, and bottom feeders on the other side,” he said. “How much that balances out in the market is too early to say.”

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