As the US election intensifies, the market seems to sense a subtle change in direction, with 'smart money' beginning to overwhelmingly bet on Trump's victory.

According to Goldman Sachs, the Trump Victory Index has just hit a historical high, while the Harris Index has returned to Biden's level.

JPMorgan also stated that hedge funds are heavily buying into the Republican victory and at the same time selling the Democratic victory. The performance of trading if Republicans win in the past month is about 7% higher than if Democrats win.

Deutsche Bank believes the market's expectations of a Trump and Harris administration are mainly reflected in the forex market. If Trump wins, the dollar will strengthen. However, the market volatility brought by the red sweep might be greater.

JPMorgan: Hedge fund flows show a strong preference for Republican themes.

The market seems to have started betting on the "Trump trade".

In a research report released on the 17th, JPMorgan stated that hedge funds have shown a strong preference for Republican themes in terms of fund flows, with winners from the Republican party being bought in the past few weeks and holding positions close to a 2-year high, while winners from the Democratic party were being sold off and holding positions at multi-year lows.

Renewable energy (a clear representative of Democratic party victory) has been heavily sold off in the past few weeks, with positions becoming more bearish once again.

Goldman Sachs stated that ETF flows typically remain positive after the elections, but the average increase in the S&P 500 index in October of the election year is small, and sometimes even declines.

Currently, the overall holding levels of the U.S. stock market are higher than before, contrary to historical patterns. Historical data shows that in the lead-up to several U.S. elections since 2012, stock market holding levels and the return rates of the S&P 500 index often decline in the weeks before the elections.

Goldman Sachs: Republican Victory Basket Hits Historic High

The scenario of a Republican victory has become one of Goldman Sachs' preferred trades before the elections. Data shows that Goldman Sachs' Republican victory basket has hit a historic high, while the Democratic victory basket has returned to Biden's levels.

Vincent Mistretta, Goldman Sachs' Deputy Head of FICC, stated in his latest research report:

"The market positioning tends to favor Trump winning. This has been the case before the recent increase in Trump's winning odds."

Anshul Sehgal, Co-Head of Global Interest Rate Products Trading at Goldman Sachs and Head of US Interest Rate Products, stated that although the market has seen some pricing volatility leading up to the upcoming elections, the overall policy impact of this event remains unclear, resulting in significant market uncertainty. He noted that during the election period, the market expects interest rate fluctuations of around 20 basis points. While this extent of fluctuation may seem slightly higher, it is not sufficient to prompt investors to take short positions during this period.

If the Republican Party wins by a large margin, the market may not see significant fluctuations on the election night, interest rates will rise, and risk assets may experience a short-term increase. This is mainly due to the market's anticipation of the continuation of Trump's tax reduction policies and the possibility of introducing additional fiscal stimulus measures.

In the scenario of a Harris victory with a divided Congress, the market will exhibit a different reaction. It is expected that in this case, the yield curve will steepen in a bullish manner, and risk assets will weaken.

Goldman Sachs forex analysts Mark Salib and Fernando Alvarado Aguilar stated that various clients have been buying this week, including hedge funds preparing for a potential Trump victory.

Many clients are preparing for a Trump victory by buying USD against offshore RMB through risk reversals, as the likelihood of a significant depreciation of USD against offshore RMB is low.

Goldman Sachs stock derivatives and index trading experts Shawn Tuteja and Joseph Clyne stated that the recent stock market rally, significant decrease in implied volatility, and the outperformance of the Russell 2000 Index over the Nasdaq 100 Index are partly due to the increase in Trump's reelection odds. However, they cautioned that if this trend reverses, the market may experience corresponding adjustments.

Overall, we are bullish on the S&P 500 Index continuing to rise above the 12% volatility level by the end of the year. This volatility level may remain stable or show positive growth during the election period. However, in the backdrop of a sustained market uptrend, the beta value of spot volatility will also increase.

The 'Trump Trade' effect seems to have resurfaced in 2016, driving the recent surge in the S&P 500 index predominantly fueled by regional banks, large banks, and the energy sector. The growth of this round of bids is to some extent at the expense of the decline in the artificial intelligence sector.

UBS's Republican victory basket has also outperformed the Democratic victory basket, rising for 14 consecutive days.

UBS trader Michael Romano wrote in a report:

"UBS's Republican vs. Democratic election hedge trade has risen by 15% so far this month, almost in a straight line, reaching new highs, indicating that the market has largely digested the expectations of Trump's victory."

Romano also added:

"This repricing is mainly driven by the banking and solar energy sectors, aligning with the growth repricing brought by strong employment data and corporate earnings growth. Therefore, it is not clear whether the recent market fluctuations are influenced by the election or growth drivers."

"Although the results are the same, with banking stocks rising, cyclical/consumer/growth-oriented stocks rising, if this repricing is more driven by actual growth, then there will be more upside after Trump's victory. Since most of the gains are reactive to bank performance and the consumer sector is showing strength, I bet there will be more upward potential in the market after Trump's victory."

Deutsche Bank: If Trump wins, the dollar will strengthen.

Deutsche Bank analyst George Saravelos analyzed possible reactions in various asset markets, especially in the forex market.

Firstly, within Deutsche Bank's team, there is significant disagreement on the market and economic growth outcomes that the election may bring, stemming mainly from the direction of fiscal policies during government division, the extent of tariff policy implementation, and the medium-term impacts of regulations, immigration, and energy policies. For example, changes in tariff policies could disrupt the supply chain, creating conflicting impacts on inflation and economic growth.

Secondly, the differences between fiscal policies and economic growth are most pronounced in the event of a Trump victory. Deutsche Bank believes that if Trump wins the presidency and the Republicans gain full control of Congress ('Red Sweep'), it would result in the largest fiscal deficit, whereas government division may bring the smallest deficit due to reduced tariff revenues. This also means that in the bond market, a Trump victory may trigger significant two-way volatility.

Furthermore, the report suggests that regardless of the congressional outcome, the market expectations between Trump and Democratic candidate Harris's governance are mainly reflected in the forex market, especially the impact related to tariff policies. If Trump wins, the dollar will strengthen, while a Harris victory may lead to a dollar decline. Overall, the forex market's response to a Trump victory is more definitive.

Lastly, Deutsche Bank believes that in the event of a Republican full victory ('Red Sweep'), the dollar will significantly strengthen, whereas a Democratic victory ('Blue Sweep') would be most unfavorable for the dollar. However, the market volatility brought by the Red Sweep may be greater, especially in the forex market.

This article is from Wall Street News, author: Zhang Yaqi; edited by Zhito Finance: Chen Xiaoyi.