Don’t “Over-Position” For Election, One Bank Warns

There’s no shortage of opinions out there with regard to how traders should position ahead of the most most pivotal and divisive US election in modern history.

Both candidates promise fiscal stimulus and both have sought to appease voters wary of an increasingly globalized economy. A Trump victory could prove disastrous for equities -at least in the short term. Indeed, it’s difficult to quantify the sheer uncertainty that would abound should the tangerine-colored, short-fused, billionaire suddenly find himself in control of the nuclear launch codes. We got a taste of the volatility that might accompany such an outcome on Friday, when the FBI announced it would reopen its investigation into Hillary Clinton’s emails:

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That move means one thing and one thing only: the market views any good news for Trump as potentially destabilizing.

Beyond equities, the outside chance of a Trump victory makes it difficult to know if the recent selloff in the long end of the curve is overdone. It’s not hard to imagine a flight to safety (i.e. flows into longer-dated Treasurys) if we wake up November 9th and discover that America has a reality TV star as president.

Alternatively, if the status quo prevails and Clinton manages to preserve America’s entrenched political aristocracy, then you’ll want to quickly assess whether the front end of the curve has adequately priced a December rate hike. That is, were Trump to win, one could easily see that giving the committee pause when comes to another 25bps. A Clinton win virtually ensures a December hike, barring some catastrophic jobs data and/or FX shenanigans out of China.

And speaking of FX, there’s the USD to worry about.

In any event, here are a few pointers from SocGen on trading the ballot:

Net long USD is rational ahead of a December Fed rate hike, but then what? We expect a 25bp rate hike in December, followed by two 25bp hikes next year in a context where the US Balance of Payments goes deeper into deficit while the euro area and Japan generate wide surpluses (Forecasting markets using balance of payments). Positioning on the UK pound remains particularly short which is in line with our own view.

A new US foreign policy could have a strong impact on EM currencies Net longs on the RUB are six standard deviations away from norm. Being bull Russia is rational from a long-term view: the country is exiting recession, inflation is falling and its central bank is loosening monetary policy. However, Hilary Clinton might become even tougher with Putin than Obama has ever been, putting in danger the long-term strategic view. Tactically, some volatility can be expected on the RUB by the end of the year. Meanwhile the MXN has started to recover, backed by strong country fundamentals and a fast-falling probability of a Trump election win. Being long MXN short RUB could become the best leveraged trade idea to position for a Clinton victory.

Long Treasury positions now almost squared Last summer, net long positions in long dated Treasuries reached exceptionally high levels that coincided with a low point in rates. Since then, long UST positions have fallen rapidly and may continue to do so if the new President, as expected, starts to spend more and if inflation creeps higher.

US equities probably the safest asset Ahead of the election, positioning on the S&P500 is far from extreme (just slightly long). US investors actually seem quite pessimistic and appalled by the electoral campaign and this might offer an interesting entry point. In this context, high net shorts on equity volatility may not be irrational. Net long positions in Technology (Nasdaq) are very high already but the sector could go through the election undamaged. In Clinton’s manifesto there are no measures against Technology, contrary to what might be the case for the Banking or Pharmaceutical sectors – especially if Elizabeth Warren were to capture a top-profile role at the Senate if the institution is taken back by the Democrats.

Trade accordingly, but it might be worth noting the complacency apparent in the following and asking yourself if it’s warranted under the circumstances …

vix

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