Written by: Zhao Ying, Wall Street Insight
The U.S. presidential election remains tense, being one of the most evenly matched elections in history, with the market betting on different outcomes. U.S. Treasuries have shifted to 'betting on Harris', while Bitcoin continues to 'bet on Trump'.
On Wednesday, as the U.S. election entered the counting phase, bond market traders increased their bullish bets on U.S. Treasuries at the last minute, turning options, futures, and cash positions all bullish, raising the stakes on Harris potentially winning the election.
Meanwhile, Bitcoin continues to support Trump, with its gains on Wednesday expanding over 2%, currently priced at $71,033, maintaining its highest weekly increase.
Analysts believe that bonds fear a Republican sweep, as Trump would advance tax cuts and tariff plans, expand the fiscal deficit, and restart an inflationary era, which would push up the yield on 10-year U.S. Treasuries. Meanwhile, cryptocurrencies could potentially win in both scenarios, as Trump is undoubtedly a supporter of cryptocurrencies, but Harris has also hinted that she would not continue Biden's harsh stance on the industry.
U.S. Treasuries shift to 'betting on Harris'
U.S. Treasury investors are aggressively entering trades that could profit from a rise in U.S. Treasuries, believing this scenario is more likely if Harris wins the election, while reducing bets on Trump's victory.
Since Monday, U.S. options activity has largely focused on short-term bullish bets, as weekend polls showed Harris gaining an advantage in her contest against Trump, with traders hoping to prepare for a potential Harris victory.
The futures market has also seen this shift, with new bullish bets emerging on Monday, including a significant increase in demand for longer-term bonds. As of the week of October 29, asset management firms' net long positions increased by about 182,000 contracts of 10-year Treasury futures.
Additionally, JPMorgan's latest client survey shows that net long positions in U.S. Treasuries are at their highest in about three months, which is another indication of the market sentiment shift.
These moves mark a shift for traders, who partly established bearish positions based on expectations of a Trump victory, but as polls show the campaign in a deadlock, investors are now preparing for the opposite possibility of election outcomes and are bracing for market volatility.
Bitcoin continues to 'back Trump'
On Wednesday, the gains expanded over 2%, currently priced at $71,033, maintaining its largest weekly increase, nearly 5% above the record low set in March.
Due to Trump's support for digital assets, the rise in Bitcoin is considered part of the so-called 'Trump trade'.
Trump has vowed that if he returns to the White House, he will make the U.S. the global cryptocurrency capital, establish a strategic Bitcoin reserve, and appoint regulators who love digital assets, indicating that he is the most friendly candidate towards the industry. Harris, on the other hand, has taken a more cautious stance, promising to support a regulatory framework for the industry.
Bonds fear a sweep, while cryptocurrencies might win?
Overall, the bond market fears a Republican sweep, while cryptocurrencies are expected to perform well regardless of the situation.
Analysts believe that a Republican landslide victory is seen as a 'clear threat' to bond buyers. In a scenario where the Republicans unify with Congress, Trump would push for tax cuts and tariff plans, expand the fiscal deficit, and restart an inflationary era. This would push up the yield on 10-year U.S. Treasuries, potentially leading to further declines in the bond market.
On the other hand, if Harris wins in a divided Congress, it could trigger a relief rally, increasing the likelihood of a deadlock, thus allowing for control over government spending.
What happens in other scenarios is almost contentious. JPMorgan's strategists expect a unified Democratic government and Congress to lead to increased government spending, thus pushing up bond yields. On the other hand, RBC Capital states that this scenario would be most favorable for bonds, leading to an increase in corporate taxes, exacerbating the 'anti-business' environment and weakening risk appetite.
Regarding cryptocurrencies, analysts believe that Bitcoin is likely to benefit from Trump's victory, as Trump is a strong supporter of cryptocurrencies, claiming to establish a strategic reserve of the original cryptocurrency and appoint regulators friendly to the industry. However, Harris's victory may not necessarily be detrimental to the industry, as she hinted that she wouldn't impose the same harsh measures on the industry as Biden.
In the short term, the optimism of cryptocurrency investors may have been partially absorbed by the market. Bitcoin's price has once again surpassed the $70,000 mark, and Bitcoin exchange-traded funds have seen the largest inflow of funds to date, coupled with the ongoing competitive uncertainty, leading to a significant increase in demand for hedging in the cryptocurrency options market.
Bloomberg statistics show that on Monday, net outflows from 12 Bitcoin ETFs managed by companies such as BlackRock and Fidelity reached an astonishing $579.5 million, setting a historical high. Options pricing suggests that the expected market volatility for Bitcoin on the day after the voting day will reach 8%.
Additionally, options traders are preparing for significant future profits. According to data from Deribit, the largest cryptocurrency options trading platform, the largest open contracts expiring in March are concentrated around strike prices of $100,000 and $110,000.
