Source: Wall Street See

With only 3 weeks left until the US election day on November 5, the potential risks that the election results may bring to the market have already been factored into pricing by traders.

Goldman Sachs trader Brian Garrett released a report today stating that the VIX fear index remains at high levels. Especially when the S&P reaches historic highs, the VIX index is still above 20, a very rare situation.

At this moment, there has been a reversal in the election situation. The team led by Liu Gang from China International Capital Corporation (CICC) expressed that previously strong momentum of Harris has been surpassed by Trump. Not only has Harris reversed in betting odds, but also fallen behind in 6 out of 7 key swing states, adding further uncertainty.

A report from Goldman Sachs shows that the index compiled by the bank, betting on a Republican victory, has soared to historic highs in recent days, while the index betting on a Democratic victory continues to decline.

The report states:

"A Trump victory is likely to have a positive impact on risk sentiment, but more at the expense of Europe and other parts of the world, and have a positive impact on US assets. In our view, the overall environment for risk assets remains positive."

Goldman Sachs previously stated that based on the sensitivity of the Republican policy excess return fund (24REPL) during the 'Trump trade' frenzy this summer to the election event, if Trump wins the presidential election, the fund is expected to rise by 8%.

UBS Group also identified a similar trend. With recent election polls shifting towards the Republicans, the bank's basket of indices betting on Republican victory has consistently outperformed the basket of indices betting on Democratic victory, with a cumulative increase of nearly 6% over the past five trading days.

What is the impact on assets?

CICC stated that whether the president can gain congressional support after the election, especially the support of the House of Representatives that leads fiscal policy, will directly affect whether related policies can be smoothly promoted.

Combining the latest opinion polls, CICC has outlined four possible scenarios:

Republican sweep (39%): Trump wins and both houses of Congress are controlled by Republicans, similar to Trump's election in 2016. In this scenario, it is more favorable for advancing Trump's policy proposals, especially tax cuts and other fiscal policies;

Democratic sweep (18%): Harris wins and both houses of Congress are controlled by Democrats, similar to Obama's election in 2008. Harris's fiscal policies would progress more smoothly in this scenario;

Trump + Democratic House of Representatives (13%): Similar to the situation after the 2018 midterm elections, then-President Trump was at odds with the Democratic Party, which dominated the House of Representatives. Trump faces greater difficulty in advancing financial and tax policies in this situation, so it is not ruled out that he may first promote foreign trade policies such as tariffs through administrative means.

Harris + Republican House of Representatives (5%): Similar to the situation since the 2022 midterm elections, then-President Biden was at odds with the Republican Party, which dominated the House of Representatives. Harris faces challenges in advancing financial and tax policies, with governance space blocked, and may focus on continuing Biden's policies and adjusting administrative measures.

In determining the impact of the election on assets, CICC believes that in addition to the inherent differences in Trump and Harris' policies, the order in which policies are implemented also has a direct impact. Overall, the most probable direction is: bullish for US stocks but unfavorable for Chinese assets; the US dollar is likely to be stronger, gold neutral, and interest rates rising; bulk commodities may benefit from expectations of Trump's stimulus.

US stocks may do better under a 'Republican Party full victory' scenario, while the 'Trump + Democratic Party' combination introduces inflation disturbances, and a 'Democratic Party full victory' scenario brings pressure for tax hikes.

Overall, there is upward pressure on US bond rates, with Trump facing greater pressure; the US dollar is likely to be strong, gold neutral, with uncertainty arising from administrative interventions for devaluation and safe-haven demand boosting gold.

Trump's policy stimulus may benefit commodities despite supply constraints, and there may also be long-term positive effects on demand.

Trump tariffs may be unfavorable for Chinese assets.

Editor / jayden