US Election Countdown: Markets are preparing for Trump 2.0.

Polling numbers are according to fivethirtyeight.com, a polling aggregator.

The oddsmakers this week say:

Betting odds numbers are according to polymarket.com, a real-money betting site for event outcomes.

This week: Betting odds and markets are prepping for Trump 2.0. But is it a fair assessment?

The US election polls have continued to drift slightly in Trump’s favour over the past couple of weeks, a continuation of the slow tightening in the polls since late August.

But betting odds on polymarket.com have shifted violently in favour of Trump winning, a move that started forming about two weeks ago. Furthermore, the polymarket.com odds of a Trump 2.0, or a “Republican sweep” in which the Republicans also take control of both house of Congress, have risen well above 40%.

And we can point to ways the markets are responding to these higher odds of Trump 2.0. But are markets and investors getting ahead of themselves here?

Chart of the week: Two ETFs suggesting that markets are pricing in Trump 2.0

 

As noted in this article, markets are pricing increased odds of a Trump 2.0 scenario in which both Trump wins and the Republicans have control of both houses of Congress post-election. The latter is critical for Trump’s full agenda to see the light of day. The chart above shows two ETFs that show how the market is bracing for a Trump 2.0 outcome. The first is in black, it’s an ETF of the largest US financial services companies, which are rising on the anticipation of more Trump corporate tax cuts and deregulation. The second is in blue. It is an ETF of long-term US treasury bonds, which are falling as US interest rates go higher. This is because the Trump 2.0 agenda is seen as both inflationary and positive for US growth, but also as Trump 2.0 would see US deficits worsen. Note the dramatic acceleration higher in the financial services ETF and the weakening of the US treasury ETF around 10 trading days ago, around the time in which Trump’s winning odds spiked higher. Other market developments that suggest markets are bracing for Trump 2.0 are the rising price of gold, as most see a Republican sweep bringing much higher inflation and greater geopolitical tensions, a weak Mexican peso on the fear that Trump’s threatened tariffs would weaken Mexico’s manufacturing sector as exports to the US would drop, and higher crypto prices as Trump has loudly pitched himself as pro-crypto.

(Specifically, the ETFs in the chart above are: 1) QDVH: The iShares S&P 500 Financial Sector UCITS ETF. As its name implies, it holds the large banks and financial services companies within the US S&P 500 index like JP Morgan, Bank of America, Wells Fargo, Goldman Sachs and others. 2) IUSV: The iShares USD Treasury Bond 20+year UCITS ETF, which holds US treasury notes and T-bonds of 20-year or greater maturities.)

Are the betting odds the real odds?

While the odds of a Trump victory have been grinding steadily higher in the polling shifts of recent weeks, the speed of the shift in the betting odds over the last couple of weeks has been far from subtle. What drove this? A Wall Street Journal article probing into the matter unearthed that a handful of accounts were behind much of the shift in odds. The article focused on the betting behaviour in polymarket.com, the largest transparent market for betting on the election outcome, with now more than USD 2.2 billion in bets placed for the election winner alone. It noted that four large accounts quickly placed some USD 30 million in bets in favour of a Trump win. The accounts were all funded from the crypto exchange Kraken, and the timing and increased size of their betting was very similar. Furthermore, the accounts have also all bet on outcomes in favour of Trump winning in individual swing states and even winning the national popular vote, which most consider extremely unlikely.

It’s hard to draw any firm conclusion from these developments, even if it does point to a single person or organization that has now tilted the real-money odds of the election outcome, as other betting markets have also shifted in favour of a Trump win. Elon Musk, now a very loud Trump supporter, has also referenced the shift in polymarket.com, arguing that betting odds are more accurate than polls. But there is a real effect: observers point out that betting odds can shape public opinion as news and social media cover the phenomenon and create buzz in favour of Trump.

Let’s remember: Trump 2.0 is a very different from “Trump gridlock”.

The conclusion here is that betting odds may or may not be overstating the overall odds of a Trump win. Tightening polls do point to higher odds of a Trump victory, due to the US’ odd electoral college system for choosing presidents in the election. (Remember: Trump won in 2016 despite losing the overall popular vote by 2.1% to Clinton.) But other odds on polymarket.com look suspicious. In particular, the site suggests that the odds of a Trump 2.0 or “Republican sweep” as they call it, are currently 42%. If the polls are correct that Harris is likely to win the overall popular vote, the House of Representatives may be more difficult for the Republicans to take than these odds suggest. Currently, polymarket.com has the “Trump gridlock” scenario, in which Trump wins, but the Republicans don’t win control of the House of Representatives, at only 16%.

As we have covered in recent weeks, Trump 2.0 and that “Trump gridlock” scenario are two very different outcomes for policy and for the markets. With Trump gridlock, the markets will mostly only get some of the Trump tariffs and a Trump foreign policy and none of the Trump tax cuts or deregulation. This is night and day for market reactions in the immediate wake of the election. In short, even if Trump shows signs of winning early on election night, investors and traders will need to focus intently on how the House election races are shaping up as well.

See you next week!

About the author: John is Saxo’s Chief Macro Strategist, with over twenty-five years’ experience in the financial markets, chiefly as Saxo’s former Head of FX Strategy. He is also an American, having grown up in Houston, TX and has a long-standing passion for following the course of US elections and their place in history since being allowed to stay up late as a young kid to watch the 1980 election results roll in and Ronald Reagan winning the presidency over Jimmy Carter.