Countdown to the election, time to take profits? Citigroup: Some Trump trades can be profitable now closed

Less than two weeks away from the U.S. presidential election on November 5th, Citigroup, which has been betting on Trump trades early on, believes it is now time to close out some of these trades for profit.

A recent report from Citigroup pointed out that historical data shows that most of the asset price fluctuations occur before the actual election, so even though investors are increasingly viewing Trump as a popular candidate this time, it is best to first lock in profits related to betting on Trump trades.

Dirk Willer, head of global macro research and asset allocation at Citigroup, wrote in the report:

"We have been long Trump trades. Investors have concluded that Trump will win, but opinion polls suggest he is only slightly ahead. Therefore, we have closed out some of our Trump-leaning election trades, but retained certain structures."

Some of the trades that Citigroup closed out for profit include its positions measuring the expected rise in U.S. inflation over the next five years - the position of the five-year breakeven inflation rate. Citigroup increased these positions earlier this month after the strong September non-farm payroll growth in the U.S.

The breakeven inflation rate is calculated from the spread between Treasury Inflation-Protected Securities (TIPS) and standard U.S. Treasury bonds. If investors are concerned about rising inflation, the breakeven inflation rate will increase. Currently, the five-year breakeven inflation rate is around 2.3%, higher than the 1.8% earlier this year.

In trades betting on Trump's election, Citigroup also closed out positions betting on a stronger dollar, especially against the euro. Since the end of September, the dollar has risen by about 3.5% against the euro. On Wednesday, the euro hit a nearly three-month low against the dollar, and by Friday, it had fallen for four consecutive weeks, marking the longest losing streak in eight months. Options market traders also expect a 40% chance of a 50 basis point rate cut at the European Central Bank's December meeting, which means the euro is expected to weaken further.

Willer wrote in the report that institutional long dollar positions "have increased significantly, the probability of a Trump victory may be nearing its peak, but we believe taking profits is a wise move." He also said, according to Citigroup's market forex quant team data, "hedge funds are pouring into long dollar positions at the highest rate in history."

At the same time, Citigroup continues to hold some Trump trades positions, such as options trades expecting the overnight pound rate to fall faster than similar contracts linked to U.S. money market rates next December, and positions betting on U.S. banks outperforming the S&P 500 index.

Wall Street News mentioned on Monday that Goldman Sachs, JPMorgan Chase, and Deutsche Bank have recently collectively voiced their support for "Trump trades." JPMorgan Chase's report last Thursday on the 17th stated that hedge fund flows show a strong preference for Republican themes, with a clear indication of Democratic victory - renewable energy has been heavily sold off in recent weeks Goldman Sachs report stated that the "Trump trade" effect in 2016 seems to be resurfacing, with the recent rise in the S&P 500 index being mainly driven by regional banks, large banks, and the energy sector. This round of buying pressure is to some extent at the expense of the artificial intelligence (AI) sector.

Deutsche Bank believes that the market expectations between Trump and Harris are mainly reflected in the foreign exchange market. If Trump is elected, the US dollar will strengthen. If the Republican Party becomes the majority party in both houses of Congress, leading to the so-called red sweep, the market volatility may be greater. And if the result is a blue sweep, that is, the Democrats win control of both houses of Congress, it will be most unfavorable for the US dollar