City holds off on big bets ahead of knife-edge US election

City of London traders are refraining from big bets on US government debt and the dollar as the US election enters its final days on a knife edge, analysts have told City AM.

With the last election taking four days to call, and polls suggesting Donald Trump and Kamala Harris are neck and neck heading into the final days, stockpickers and currency investors are opting to sit out hefty trades until the outcome is clear.

“Facing many more questions than answers about the future direction of US economic, trade and foreign policy, the best investors can do is prepare and plan ahead for a series of ‘what if’ scenarios,” said Peel Hunt chief economist Kallum Pickering.

“The worst near-term outcome would be no clear result – as that would prolong the uncertainty.”

Those that are feeling confident on either candidate’s victory have been taking positions on Treasuries, the UK gilt market and the dollar, as they “all feel like election bets at this point,” said Abrdn deputy chief economist, Luke Bartholomew.

“I definitely feel like there is limited conviction around actively wanting to take a bet on the US election right now unless that is what you want to do,” he added.

One FX broker told City AM he was preparing for a 4am start in the days following the election, and warned that the whole thing “could easily be dragged out until next week”.

Trump’s supporters have admitted his policies are likely to hurt domestic stock performance, with Elon Musk agreeing that “markets will tumble” if Trump wins thanks to potential uncertainty around mass deportations and trade battles.

The former president is promising to implement across-the-board trade tariffs of 10 per cent on all US imports, which could bring up inflation as prices rise for US consumers.

Trump’s tax plans, which are expected to be a repeat of his $1.9 trillion bill from 2017, could also balloon the already significant US deficit, further worsening inflation.

This has caused many traders to flee from US Treasuries, as Trump’s plans could cause the Federal Reserve to pause its rate-cutting cycle.

“If I just look at Treasury yields, we’ve already started seeing movement as polls start pricing in a possibility of a Republican sweep, which several weeks ago seemed highly unlikely,” said Sonal Desai, CIO of Franklin Templeton’s fixed income arm.

Trade wars could also hit the UK and Europe, with estimates that EU exports to the US will drop by around 150bn euros (£126bn) a year if his plans are implemented.

Europe’s Stoxx 600 dipped two per cent last week as Trump’s chances in betting markets rose.

“Given Trump’s vocal position on pushing for a swift end of the war in Ukraine and criticism of US financial support for the war effort, aerospace and defence stocks might rally from a Democrat win if this signals continued support for Ukraine,” noted Jason Hollands, managing director of Bestinvest.

“That said, defence spending rose significantly under the first Trump administration and US defence companies are going to be beneficiaries of increased military spending by NATO members.”

However, Harris would likely continue Biden’s agenda of investing in renewable energy, infrastructure and an anti-trust agenda in breaking up large corporations, leaving investors to pile into green stocks and housebuilders.

“Harris’ plans for higher taxes, spending, and regulations are an expanded version of the Biden administration’s platform,” said Peel Hunt’s Pickering.

“However, her flirtation with price controls, higher corporation taxes, and even a tax on unrealised capital gains represent a lurch to the left.”

Gold, Bitcoin and other safe haven assets would also likely sink following a Harris victory, as the status quo is maintained in the White House. Trump is expected to deliver a boost to Bitcoin, however, after talking up digital currencies throughout the campaign.