Investing.com -- Credit markets price in a higher probability of a Donald Trump win at the upcoming election, but other markets “appear to price in rather modest probability,” JPMorgan (NYSE:JPM) strategists led by Nikolaos Panigirtzoglou said in a note.
Equity trades suggest an average probability of around 22%, strategists note, with similar levels in rates and little indication in foreign exchange (FX) markets.
JPMorgan said investors are asking positioning-related questions ahead of the election, particularly about how much room is there for further short covering and position unwinding.
“In other words, by looking at the asset classes, which shorts could be covered and which positions could be unwound further in a Trump win scenario?” is the question being asked, strategists point out.
In the equity space, there is potential for further short covering in stocks, particularly within U.S. regional banks and small caps, if President Trump secures a win.
JPMorgan notes that this assessment is based on the comparison of market moves since August 1st, which avoids the volatility following the weak U.S. payroll report on August 2nd.
“The short interest on US regional banks remains well above that of the S&P500 or large US banks (BKX index), thus leaving room for further short covering in a Trump win,” strategists wrote.
Meanwhile, in the FX space, analysis of futures positions implies that the long euro/short dollar positions built up between October 2023 and July 2024 have been largely unwound. However, there is still potential for this trend to revert to 2022 levels if Trump's tariff threats become a reality.
Moreover, strategists said that in the rates market, long-duration positions in 10-Year Treasury futures have been halved since peaking between July and September, leaving room for further unwinding if Trump wins.
In the credit market, the significant tightening of U.S. corporate credit spreads since August reflects a higher probability of a Trump win.
Elevated short interest in the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSE:LQD) suggests “that there could be even further tightening in credit spreads in a Trump win due to short covering,” strategists said.