On Tuesday, November 5th, the final battle day of the USA election has arrived. Tony Pasquariello, a top trader at Goldman Sachs and head of research at a hedge fund, warns that on this crucial election day, individuals who prefer risk investments should "buckle up", as fund managers have recently taken the initiative to reduce risks.

Pasquariello stated that from the clear cash flow situation of Goldman Sachs' proprietary trading, it is evident that the trading community has been preparing for the election in recent weeks, significantly reducing risks. Data from the Goldman Sachs Prime Brokerage (PB) business shows that in the US stock market, the aggregate exposure of stock fund managers using fundamental L/S strategies has dropped to the lowest level since March 2023.

Furthermore, reducing positions is not limited to hedge funds. Last week, clients who only implemented long strategies net sold $10 billion worth of stocks, marking the highest weekly selling volume of the year, which could be for fundraising for other actions or not.

There are other obvious defensive signs in the US stock market, both in options skew and S&P futures positions (recent trend = bullish decreasing, bearish increasing). In addition, Pasquariello points out that macro positions seem significantly reduced, most noticeably in the US interest rate positions.

Pasquariello believes that this Tuesday will be both relaxed and yield good profits from the beginning of the year, as investors will quickly catch up with the market trends brought by the initial election results. If this prediction is correct, he will closely monitor the bond market, where the preference has always been to sell the mid and/or back end of the yield curve.

For stocks, the most obvious point for Pasquariello is: any seemingly clear election result will swiftly devastate implied volatility.

Wall Street News mentioned earlier in the week that Wall Street strategists generally believe that the US Treasury yield will determine the trend of US stocks after the US election.

Among them, Morgan Stanley's Chief US stock strategist Mike Wilson led the team believes that in the event of Trump's election and the Republicans winning the majority in both houses, known as the red sweep, if after the election results are announced, the US Treasury yield remains at a certain level for a few days (such as the fluctuation of the 10-year Treasury yield does not exceed 20 basis points), and the increase in yield is driven by improvements in nominal growth expectations, then cyclical stocks (financial, industrial, and commodity-sensitive industries) may perform well and drive the index higher.

If the US Treasury yield 'substantially' rises after the election results are announced, and the term premium rises due to market concerns about the sustainability of the fiscal outlook, stock market risk aversion sentiment may intensify.

If Harris wins and Congress is divided, with Democrats and Republicans respectively controlling both houses, in this scenario, consumer stocks affected by tariffs and wind power stocks will perform well. Falling interest rates may also benefit housing-sensitive consumer stocks and high beta value stocks, while financial stocks, industrial stocks, and commodity-sensitive industries may underperform.

However, Wilson expects this initial trend to be relatively mild, and apart from financial stocks, the long positions betting on a Republican victory in October did not experience significant fluctuations. Compared to the situation under the Trump administration, under a Harris administration, financial stocks may perform poorly in the short term due to potential stricter regulation.

Editor/Somer