US Bonds "Back Harris," Bitcoin "Stands with Trump": How is the Market Interpreting the US Election?

US Bonds "Back Harris," Bitcoin "Stands with Trump": How is the Market Interpreting the US Election?The US presidential election has entered its final stages of counting, and the market's reaction to the election results is becoming increasingly tense. Bond traders are increasing their bullish bets on US bonds at the last minute, believing that Harris is more likely to be elected, while Bitcoin continues to favor Trump, surging more than 2% on Wednesday, now trading at $71,033

US Bonds "Back Harris," Bitcoin "Stands with Trump": How is the Market Interpreting the US Election?

The US presidential election has entered its final stages of counting, and the market's reaction to the election results is becoming increasingly tense. Bond traders are increasing their bullish bets on US bonds at the last minute, believing that Harris is more likely to be elected, while Bitcoin continues to favor Trump, surging more than 2% on Wednesday, now trading at $71,033.

US Bonds Turn to "Backing Harris"

Since Monday, the U.S. options market has been dominated by short-term bullish bets. With weekend polls showing Harris holding an edge over Trump, traders are looking to prepare for a potential Harris victory. The futures market has seen a similar shift, with new long positions emerging on Monday, including a significant increase in demand for longer-term bonds. In the week ending October 29, asset managers added approximately 182,000 net long positions in 10-year Treasury futures. Additionally, a recent JPMorgan client survey reveals that net bullish positioning in U.S. bonds is at its highest in three months, another indication of the changing market sentiment.

These moves suggest a shift in traders' strategies. They had previously built up bearish positions, partly due to expectations of a Trump victory. However, with polls showing a tight race, investors are now preparing for the opposite possibility and bracing for market volatility.

Bitcoin Remains "With Trump"

Bitcoin rose more than 2% on Wednesday, reaching $71,033, maintaining its biggest weekly gain and remaining less than 5% below its record high in March. The surge in Bitcoin is seen as a so-called "Trump trade" due to Trump's support for digital assets. Trump has pledged that if he returns to the White House, he will make the U.S. the global cryptocurrency capital, build a strategic Bitcoin reserve, and appoint pro-digital asset regulators, signaling his position as the most friendly candidate for the industry. Harris, on the other hand, has taken a more cautious stance, promising support for a regulatory framework for the industry.

Bonds Fear a Sweep, Crypto Wins Either Way?

Overall, the bond market is most fearful of a Republican sweep, while cryptocurrency is expected to perform well regardless of the outcome. Analysts believe a Republican landslide is considered a "distinct threat" to bond buyers. With a Republican-controlled Congress and White House, Trump would push for tax cuts and tariffs, expanding the fiscal deficit and reigniting an era of inflation. This would push up 10-year U.S. Treasury yields, potentially leading to further declines in the bond market.

On the other hand, if Harris wins with a divided Congress, it could lead to a relief rally, increasing the likelihood of gridlock and therefore controlling government spending. What happens in other scenarios is largely debated. JPMorgan strategists forecast that a unified Democratic government and Congress would lead to increased government spending, pushing up bond yields. Conversely, RBCCapital argues that this scenario would be most favorable for bonds, leading to higher corporate taxes, a more "unfriendly to business" environment, and weakened risk appetite.

In the cryptocurrency realm, analysts believe Bitcoin stands to benefit from a Trump victory, as he is a vocal supporter of cryptocurrencies, promising to establish a strategic reserve of the original cryptocurrency and appoint pro-industry regulators. Nevertheless, a Harris win wouldn't necessarily be detrimental to the industry, as she has hinted at refraining from the harsh crackdowns on the industry that Biden implemented.

Market Sentiment Fluctuates

In the short term, the optimistic sentiment among cryptocurrency investors may have been partly absorbed by the market. Bitcoin's rise back above the $70,000 mark, coupled with the largest ever inflows into Bitcoin exchange-traded funds (ETFs), and the ongoing close race, has led to a significant increase in demand for hedging in the cryptocurrency options market. Bloomberg statistics show that 12 Bitcoin ETFs managed by BlackRock, Fidelity, and other companies saw net outflows of a staggering $579.5 million on Monday, the highest ever recorded. Option pricing suggests that the anticipated market volatility in Bitcoin on the day after the vote will reach 8%. Moreover, options traders are prepared for substantial future gains. According to the largest crypto options trading platform Deribit, the largest open interest for contracts expiring in March is concentrated around strike prices of $100,000 and $110,000.

In conclusion, the outcome of the U.S. election will have a profound impact on financial markets, and market participants are actively adjusting their investment strategies in preparation for various possibilities. The movements in US bonds and Bitcoin are just one interpretation of the market's reaction to the election results. Ultimately, the final outcome will depend on a wide range of factors.