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Financial markets are betting on a Trump victory

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THE FINAL election polls have been published, and in-person voting has yet to conclude. It is an anxious period, with little new information to parse about who might emerge victorious as America’s next president. But that is not stopping investors from placing, and adjusting, their bets. From prediction markets to bonds, they have more ways than ever to register their views about the likely outcome of the election. Most of their money is on Donald Trump, though his perceived lead over Kamala Harris has narrowed in the past few days.

The easiest place to get a read on the thinking of punters is in election-betting markets. The three that get the most attention are Polymarket, Kalshi and PredictIt. Polymarket, a cryptocurrency-based platform that bills itself as the world’s biggest prediction market, gives Mr Trump a roughly 60% chance of winning the election, as of Monday afternoon in America. That is down from 67% last week, a shift that came after a few late polls—notably, the surprising Selzer poll in Iowa—were more positive for Ms Harris. But Polymarket has plenty of critics, with some arguing that its pricing is easily manipulated.

By contrast, PredictIt, the oldest of the three online betting markets, founded exactly a decade ago, has Ms Harris ahead by the slimmest of margins. But it is also the most limited of the platforms, by design, with strict caps on the number of bettors and the size of their bets. Kalshi, a regulated exchange, comes just about down the middle. It currently sees a 56% probability of victory for Mr Trump, down from 65% last week. In the immediate aftermath of the Selzer poll, Kalshi in fact briefly showed that Ms Harris was the favourite before shifting back in Mr Trump’s direction.

It may seem easy to dismiss these various platforms as silly betting arenas for punters, dominated by young men who spend many of their waking hours online. It is striking, however, that their pricing has closely mirrored “real money” in more established markets. To get a sense of how equity investors are positioned for the election, analysts at Piper Sandler, an investment bank, created two separate portfolios of stocks whose fortunes may rise or fall depending on the presidential victor. Their Trump portfolio features oil companies and weapons manufacturers, plus shorts on firms such as Apple that would be hurt by a trade war with China. Their Harris portfolio is heavy on producers of renewable energy and electric vehicles, while betting against financial firms and drug makers that may face more rules under Democrats.

The performance of the Piper Sandler portfolios lines up almost perfectly with the Polymarket odds. In October, as the betting markets turned against Ms Harris, the Trump portfolio gained about 3% and the Harris portfolio fell by 7%. But over the past week, that gap has closed. For instance, Geo Group, a prison operator in the Trump portfolio, has come under selling pressure, while First Solar, a solar-panel manufacturer in the Harris portfolio, has climbed higher. Citrini, a research firm, has yielded similar results with its Trump-aligned basket of stocks. It soared in July after Mr Trump survived an assassination attempt at a rally in Pennsylvania, tumbled when Ms Harris entered the race and recovered as she seemed to lose momentum. But on Monday, the first trading day after the Iowa poll, Citrini’s Trump basket was down by about 1.4% by the middle of the day.

Election predictions have also had an impact on much bigger, more diffuse markets. Yields on Treasuries and the dollar’s value have climbed over the past six weeks, in part because investors have been girding themselves for a Trump presidency. Their thinking is that his policies, including heftier federal deficits and higher tariffs, are likely to drive up both growth and inflation. Such a backdrop would, in theory, support the dollar and weigh on bond prices, leading to an upward drift in yields. But Monday brought a partial reversal of these trends, with small declines in both yields and the dollar—reflections of Ms Harris’s improved standing in the polls.

What to make of all this trading? One conclusion is that investors are a highly uncertain bunch. Polls have been neck and neck almost the entire race, even as the pricing of election-related trades has swung up and down.

Cutting through that volatility, a second conclusion is that investors have, fairly consistently, been more confident in Mr Trump’s chances than the polls themselves. The Economist’s model, based on polls and fundamental factors, rates the election as a true toss-up. Financial markets—from small-time punters on betting exchanges to the giant institutions that determine the prices of bonds—are closer to 55% in favour of Mr Trump. That is a coin flip but one clearly weighted against Ms Harris.

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Economics

Trump and Fed Chair Powell could be set on a collision course over rates

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Jerome Powell and President Donald Trump during a nomination announcement in the Rose Garden of the White House in Washington, D.C., U.S., on Thursday, Nov. 2, 2017.

Andrew Harrer | Bloomberg | Getty Images

President-elect Donald Trump and Federal Reserve Chair Jerome Powell could be on a policy collision course in 2025 depending on how economic circumstances play out.

Should the economy run hot and inflation flare up again, Powell and his colleagues could decide to tap the brakes on their efforts to lower interest rates. That in turn could infuriate Trump, who lashed Fed officials including Powell during his first term in office for not relaxing monetary policy quickly enough.

“Without question,” said Joseph LaVorgna, former chief economist at the National Economic Council during Trump’s first term, when asked about the potential for a conflict. “When they don’t know what to do, oftentimes they don’t do anything. That may be a problem. If the president feels like rates should be lowered, does the Fed, just for public optics, dig its feet in?”

Though Powell became Fed chair in 2018, after Trump nominated him for the position, the two clashed often about the direction of interest rates.

Trump publicly and aggressively berated the chair, who in turn responded by asserting how important it is for the Fed to be independent and apart from political pressures, even if they’re coming from the president.

When Trump takes office in January, the two will be operating against a different backdrop. During the first term, there was little inflation, meaning that even Fed rate hikes kept benchmark rates well below where they are now.

Trump is planning both expansionary and protectionist fiscal policy, even more so than during his previous run, that will include an even tougher round of tariffs, lower taxes and big spending. Should the results start to show up in the data, the Powell Fed may be tempted to hold tougher on monetary policy against inflation.

LaVorgna, chief economist at SMBC Nikko Securities, who is rumored for a position in the new administration, thinks that would be mistake.

“They’re going to look at a very nontraditional approach to policy that Trump is bringing forward but put it through a very traditional economic lens,” he said. “The Fed’s going to have a really difficult choice based on their traditional approach of what to do.”

Market sees fewer rate cuts

Futures traders have been waffling in recent days on their expectations for what the Fed will do next.

The market is pricing in about a coin-flip chance of another interest rate cut in December, after it being a near-certainty a week ago, according to the CME Group’s FedWatch. Pricing further out indicates the equivalent of three quarter-percentage-point reductions through the end of 2025, which also has come down significantly from prior expectations.

Investors’ nerves have gotten jangled in recent days about the Fed’s intentions. Fed Governor Michelle Bowman on Wednesday noted that progress on inflation has “stalled,” an indication that she might continue to push for a slower pace of rate cuts.

“All roads lead to tensions between the White House and the Fed,” said Joseph Brusuelas, chief economist at RSM. “It won’t just be the White House. It will be Treasury, it’ll be Commerce and the Fed all intersecting.”

Indeed, Trump is building a team of loyalists to implement his economic agenda, but much of the success depends on accommodative or at least accurate monetary policy that doesn’t push too hard to either boost or restrict growth. For the Fed, that is represented in the quest to find the “neutral” rate of interest, but for the new administration, it could mean something different.

The struggle over where rates should be will create “political and policy tensions between the Federal Reserve and the White House that would clearly prefer lower rates,” Brusuelas said.

“If one is going to impose tariffs, or mass deportations, you’re talking about restricting aggregate supply while simultaneously implementing deficit finance tax cuts, which is encouraging an increase in aggregate demand. You’ve got a basic inconsistency in your policy matrix,” he added. “There’s an inevitable crossroads that results in tensions between Trump and Powell.”

Avoiding conflict

To be sure, there are some factors that could mitigate the tensions.

One is that Powell’s term as Fed chair expires in early 2026, so Trump may simply choose to ride it out until he can put someone in the chair more to his liking. There’s also little chance that the Fed would actually move to raise rates outside of some highly unexpected event that would push inflation much higher.

Also, Trump’s policies will take a while to make their way through the system, so any impacts on inflation and macroeconomic growth likely won’t be readily apparent in the data, thus not necessitating a Fed response. There’s also the chance that the impacts might not be that much either way.

“I expect higher inflation and slower growth. I think the tariffs and the deportations are negative supply shocks. They hurt growth and they lift inflation,” said Mark Zandi, chief economist at Moody’s Analytics. “The Fed will still cut interest rates next year, just perhaps not as quickly as would have otherwise been the case.”

Battles with Trump, then, could be more of a headache for the next Fed chair, assuming Trump doesn’t reappoint Powell.

“So I don’t think it’s going to be an issue in 2025,” Zandi said. “It could be an issue in 2026, because at that point, the rate cutting’s over and the Fed may be in a position where it certainly needs to start raising interest rates. Then that’s when it becomes an issue.”

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Economics

Congestion pricing in New York gets the go-ahead after all. Maybe

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NOVEMBER 20th marks the first “Gridlock Alert” day of New York City’s holiday season. This is the official designation for the city’s busiest traffic days of the year. But traffic is bad most days, with more than 900,000 cars entering Manhattan’s central business district. INRIX, a traffic-data firm, found that New York City leads the world in urban traffic congestion among the cities scored, with the average driver stationary for 101 hours a year. After years of false starts, including a cowardly pre-election pause by Kathy Hochul, New York’s Democratic governor, congestion pricing has the green light.

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Economics

Howard Lutnick, Donald Trump’s pick for commerce secretary

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Editor’s note: On November 19th Donald Trump chose Howard Lutnick to be commerce secretary in his new administration. We published this profile of Mr Lutnick on November 16th and have updated it to include his appointment.

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