As the 2024 US elections unfold, market participants are already pricing in potential outcomes reminiscent of the 2016 election cycle, particularly with the prospect of a Trump victory.
Early trading has seen a notable surge in Treasury yields and the US dollar, reflecting heightened expectations surrounding Trump's inflationary policies. The US 10-year Treasury yields jumped by 18 basis points, while the two-year yields increased by 10 basis points, indicating a strong market sentiment leaning towards a Republican resurgence. This shift has led to speculation about a possible 'Red Wave' that could further elevate yields and strengthen the dollar.
In the equity markets, US small-cap futures have shown significant outperformance, benefiting from Trump's "America First" policies and a deregulation agenda. The Forex market has also reacted, with the USD/MXN rising over 3% and USD/JPY climbing 1.4%. Conversely, other USD pairs such as AUD/USD, EUR/USD, and GBP/USD have faced downward pressure, each declining by more than 1%. The cryptocurrency market has not been left out, as Bitcoin reached a new record high, buoyed by Trump's pro-crypto stance, which has invigorated investor sentiment in digital assets.
The US dollar index has gained nearly 1% in recent trading sessions, effectively reversing losses from the previous week. A Trump victory is perceived as beneficial for the dollar, given that his policies on trade, immigration, and fiscal spending are generally viewed as inflationary. The dollar's bounce off its 200-day moving average suggests a potential upward trajectory, with the daily moving average convergence/divergence (MACD) indicating a positive crossover earlier this month. Market analysts are closely monitoring the 105.32 level, where a trendline resistance may be tested in the near future.
However, the prospect of a Trump administration also raises concerns about aggressive protectionist measures that could negatively impact trade relations, particularly with China. The Hang Seng Index has already reflected this sentiment, declining by 2.7% and erasing nearly all gains from the previous day. The index is currently navigating a consolidation phase, with the 20,300 level under scrutiny; a breakdown could trigger further selling pressure, potentially pushing the index down to the 19,500 mark.
The EUR/USD pair has also experienced weakness, as market participants anticipate the implications of Trump's trade policies on the Eurozone economy. Tariffs and restrictions on European goods could dampen economic growth in the region, leading to a depreciation of the euro. Currently, buyers are attempting to defend a crucial upward trendline support at the 1.077 level, which is vital for maintaining the broader upward trend. Should this support fail, the pair may be poised to test its June 2024 low at the 1.066 level.
The potential for a shift in market dynamics hinges on the election outcomes, with significant implications for both the US and global economies. The interplay between domestic policies and international trade relations will be critical in shaping investor sentiment and market movements in the coming weeks. As the election progresses, the financial landscape remains fluid, with traders and investors keenly observing developments that could influence their strategies.