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2024 US Presidential Election

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Ready to trade? (Market Analysis)

While trading around the election is not for everyone, for the nimble trader, the US election could offer increased opportunity to capture the volatility that is likely to be seen across markets. However, for anyone choosing to be active in the markets this week, a heightened approach to managing risk and correctly sizing positions is arguably the greatest consideration. Making life even more challenging, consider that while the US election news flow will dominate, traders have the added risk of navigating the FOMC meeting (a 25bp cut expected), China’s NPC Standing Committee, RBA (no change) and BoE (25bp cut expected) meetings, while 8% of the S&amp;P500 market cap report earnings. For AUS200 traders we see earnings from Westpac, NAB and ANZ. The need to be extra vigilant, dynamic, reactive, and open-minded to the deluge of news and the subsequent reaction in price is essential in the quest to preserve capital and to live to fight another day. The risk manager considers: • Whether to hold positions and carry risk when not in front of the screens. • Sizing positions correctly, especially if the intraday ranges and volatility increase. • Liquidity Conditions – it is feasible to think top-of-book liquidity and liquidity density in futures, spot FX and equity markets thins out, resulting in increased volatility and exacerbated movement. • Where to source and how to react to breaking news. While few can interpret and react to news at the speed the algo’s deployed by the institutional players will, a first-mover advantage could still be advantageous. • If trading a discretionary system, having an open mind, removing all political bias and emotion is critical. We head into a week where movement in markets will reek of irrational behaviour. The price is the price, respect the flows, and be a slave to price action. • If trading US equity, Pepperstone’s 24-hour share CFDs may offer a more unique vehicle to hedge and capture price moves when the exchanges are closed.

<h2>Expectations from polling and betting markets</h2>

The weight of money in the betting markets has held a higher probability of Trump getting the gig for some time. Yet, while market players have seen the betting markets as a loose guide on sentiment, they’ve also held a high degree of scepticism on using these odds as a true signal. The well-followed pollsters who run probability distribution models have also recently lowered Trump’s odds of becoming president. For example, The Economist has lowered Trump’s implied chances to 48% (Harris 52%). Nate Silver has also reduced his tracking estimate towards 50/50, while the ABC/538 model has Trump winning 53 times out of 100 simulations. In 2020 just 42,918 votes got Biden over the line. In 2016, while Clinton won the popular vote by 2.1 points, Trump ultimately won the election through the Electoral College system with just 77k separating them. It is feasible to think a small number of votes separate Trump and Harris this time around, although voter turnout and a strong showing from various demographics on important social issues could open the possibility of a greater share of the Electoral College votes and it may not prove to be as close as many think. <h2>How the election could be won</h2>

(Source: 270towin) To become president the winner needs 270 electoral college (EC) seats. Given certain states always vote Republican (REP), and others always vote Democrats (DEM) the assumption is the DEMs start with 226 electoral college (EC) seats, and the REPs 219 EC seats. Essentially, Kamala Harris needs to pick up 44 EC seats, and Donald Trump 51 EC seats. To get to 270 EC seats, the seven key swing states (see below), offering a total of 93 EC seats, is where the election will be won. North Carolina (NC) and Michigan (MI) are historically the first swing states to be called, and both are, therefore, seen as key election bellwethers - so the outcome in either state could set expectations and could move markets. If Harris wins NC, then we’ll likely see her odds of winning the election increase. One would assume that many of the Trump trades would start to be cut back, with the USD, gold, and Bitcoin subsequently trading lower. <h4>All eyes on Pennsylvania </h4>If Trump can win in NC, not only would it increase his chances of becoming president, but it would also raise the prospect of Pennsylvania (PA) being the state that decides the election, just as it was in 2020. Unlike many other states, PA doesn’t start counting mail-in votes until the day of the election, so to get a firm outcome in PA may take longer. We may not know the outcome of PA until at least the early hours of Wednesday in the US (ET time), late Asia trade. Essentially if Trump or Harris can claim PA, then they would require just two additional swing states to win the election. <h2>Key Times to be aware of: </h2>• Exit poll embargos are lifted on the day at 5 pm ET (Wednesday 9 am AEDT / 22:00 GMT) • While early processing of ballots is allowed in Arizona, Georgia, Michigan, Nevada and North Carolina, news networks (such as AP) cannot make projections until the polling closes in each respective state. • The expected closing times for polling stations are as follows:

In theory, for those trading through Asia on Wednesday, the period between 11 am and 2 pm AEDT (00:00 to 03:00 GMT) could be where the noise ramps up and it gets lively in markets. It’s here that traders will need to be ready to react to an outcome being called in certain states, as they will on the prospects of a recount. The polls in NC are expected to close at 19:30 ET, with polls in PA closing 30 minutes later. In 2016, PA was called by AP at 01:35 ET (17:35 AEDT), and markets will be keen for a similar outcome this time around. Historically, networks, on average have called the US election results around 23:20 ET (15:20 AEDT) on the day of the election. The obvious concern is that markets won’t learn of an outcome on Tuesday (Wed AEDT/GMT) and given the late counting of mail-in votes in certain key states, there’s a real possibility that this is a scenario traders need to prepare for. <h2>Will recounts affect the outcome? </h2>Recounts are another factor that could delay calling an outcome, especially if the margin in a key swing state is very close. In 4 of the 7 swing states, there is an automatic recount if the initial winning margin is within 0.5%. Trump or Harris can also petition for a recount in most swing states even if the initial winning margin is above 0.5%. In 2020, PA came in with a margin for Biden of 1.1%, Trump petitioned, got the recount, and the result wasn’t known for 3 days. Recounts, however, have no history of changing the initial result and only once have we seen a recount change an initial state outcome. <h2>The Congressional battle </h2>If Kamala Harris takes the election, the outcome of the House will matter less to markets, as it is widely assumed that the REPs will control the Senate, and therefore with a split Congress Harris will be unable to pass any of her key fiscal agenda. This is different for Trump if he were to become president. Should the REPs control both the House, and the Senate Trump would have a far greater capacity to pass his proposed tax cuts, and his full range of fiscal measures, as well as deregulation and more extensive tariffs. However, given there are key several states, such as New York and California, that allow for mail-in ballots to be sent in up to seven days after the election, we may not know the outcome of the House battle for a week, perhaps longer. So, while we may see increased movement in markets if Trump becomes president, this period of uncertainty may see some hold off from really going hard on expressing Trump trades until the House result is known. Making trading through this period of limbo even more of a challenge is that it would fall over the FOMC and China NPC meetings. <h2>Trading the markets </h2>• The cleanest expression for the election remains through the FX channels – notably, USDCNH, USDMXN, USDJPY and EURUSD. • Given Trump’s proposal of 60% tariffs on China and 10%+ tariffs across the board, it is widely considered that a Trump win will be positive for the USD – however, given the recent moves in markets, many feel that this outcome has been discounted. • Consider any counter-measures from the Chinese authorities, with the China NPC meeting in play between 4-8 Nov. This could mean being incredibly alert when trading USDCNH, CN50, and HK50. • A Harris win and a split Congress would likely result in ‘Trump trades’ quickly reversed and priced out. The USD, gold, Bitcoin and US equity would likely head lower, with relief buying in Chinese/HK equity. • A Trump presidency with full control of Congress (i.e. a ‘Red Sweep’) could be most impactful. As mentioned, timing is an issue, but on this outcome, one would expect a solid selloff in the US10yr Treasury resulting in a spike higher in the USD, with gold and US banks also rallying strongly. The moves in US equity/indices would be less clear, as on the one hand, it could be argued that this outcome should be good for US equity, Bitcoin, US banks, small caps, and tech. However, if the market becomes overly concerned about ballooning US debt levels, then we could see inflation fears resurface (it's why gold and Bitcoin are at/near ATHs) and that may see US equity trade lower. • A ‘Red Sweep’ could see crude trade lower given Trump has proposed increasing US crude output by 3 mbpd. With the US already producing a record 13.4 mbpd, it feels a tall order to push output to 16.5m bpd, and certainly, the US oil producers would be cognisant of the negative effect higher output would have on the crude price. <h2>Implied moves on the day </h2>The options market offers insights into the implied moves in markets on the day of the election – I’ve laid out the current implied moves, although this pricing is dynamic and will change into next week’s election. • NAS100 -/+2.3% • S&amp;P500 -/+1.8% • NKY225 -/+2.6% • US2000 -/+2.8% • China equity ETF (FXI) -/+3.9% • Silver -/+3.4% • Gold -/+1.7% • USDJPY -/+1.2% • EURUSD -/+0.9% Good luck to all.

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Preparing for the US Election – What traders need to know

Traders also need to consider: <ul><li>Quantifying the level of Trump tariff risk premium already priced in the USD and other markets. </li><li>Who becomes president but also which party controls the House and the Senate (Congress) and the make-up of Congress. If one party were to get a sweep this could have significant implications for markets, and the extent of the potential moves in price.&nbsp; </li><li>The timing of the results – with the polls so close, it seems likely that recounts will occur in some of the 7 battleground states, which could delay the result.&nbsp; </li><li>Changes in underlying liquidity conditions – reduced liquidity conditions in the order book as we head towards 5 November would exacerbate movement, increase volatility and potentially result in wider bid-offer spreads. </li><li>Whether the numbers used in the respective campaigns are realistic or simply campaign rhetoric designed to get votes.&nbsp; </li><li>Whether the one-off rise in import prices from tariffs has any bearing on the Fed’s thinking on future rate cuts.&nbsp; </li></ul><h3>The current state of the race&nbsp;</h3>

<h3>Current expectations of movement on election day in key markets&nbsp;</h3>Using options pricing, we can assess the implied move on the day of the election in some of Pepperstone’s core markets, and many other election expressions. These implied moves change dynamically on the demand for volatility – we highlight a snapshot of the current implied movement for the day of the election.&nbsp;

<h2>Scenario 1 - Trump president / Split Congress (DEMs control the House / REP the Senate)</h2>Key policies to focus on – Trump has campaigned heavily on raising tariffs on countries that run a sizeable trade surplus with the US. Notably, Trump has pledged to raise tariffs on Chinese imports by 35ppt to 60%, with a minimum 10% blanket tariff on all imports. While Trump would find it hard to pass many of the more prominent fiscal measures through the House, he can raise the tariff rate through orders without the blessing of Congress.&nbsp;So in this scenario, tariff risk, international relations, and the subsequent countermeasures from the countries affected will immediately become the central focus.&nbsp;<h3>Trading expressions that align with this election outcome and rising tariff risk:</h3><ul><li>Long USDMXN &amp; USDCAD</li><li>Short MXNJPY&nbsp;</li><li>Long USDCNH</li><li>Long USDBRL</li><li>Long USDKRW&nbsp;</li><li>Short EURUSD &amp; EURCHF</li><li>Long US30 / short US500 (as a pairs trade)</li><li>Long US2000 / short HK50 (as a pairs trade)</li><li>Long Solano, Bitcoin or Ethereum&nbsp;</li><li>Short Global Clean Energy ETF (ICLN.US)</li></ul><h2>Scenario 2 - The ‘Red Sweep’ - Trump president / REP controlled Congress (House &amp; Senate)</h2>A ‘Red Wave’ scenario, where the GOP party controls both chambers of Congress, opens the prospect of Trump going even harder on tariffs, initiating new tariffs on a far wider range of goods – the question then becomes whether uses tariffs as a negotiation tool (like we saw in 2018), or to raise revenues.&nbsp;Trump would also have a smoother passage to push for the deregulation of industry, tax changes, and a wider range of fiscal measures. Given these fiscal measures would significantly increase the deficit in the years ahead, one suspects they would need to be offset and funded by tariffs. This suggests in this scenario tariffs would need to be a significant revenue raiser, or the bond market could express clear disappointment, resulting in a trend higher in Treasury yields.&nbsp;&nbsp;While traders have bought volatility through optionality, a ‘Red sweep’ outcome is far from priced into FX, equity or bond markets.The key policies that could move markets:<ul><li>Increased scope and scale of trade tariffs</li><li>A 1ppt cut to the corporate tax rate to 20%</li><li>The full rollover of the 2017 Tax Cuts and Jobs Act in late 2025</li><li>Reduced regulatory oversight&nbsp;</li><li>Reduced immigration&nbsp;</li></ul><h3>Trading expressions that align with a ‘Red Sweep’ scenario&nbsp;</h3><ul><li>‘Buy US-focused risk assets’&nbsp;</li><li>Short US 10-Treasury futures (USTN10YR) or the TLT ETF – US bonds would likely be sold on higher US growth expectations and expectations of increased future Treasury supply to fund the increasing deficit.&nbsp;</li><li>Long USDs on a broad basis:<ul><li>USDJPY and USDCHF – Where both FX pairs benefit from higher US Treasury yields&nbsp;</li><li>Long USDCNH – as we saw in 2018, the PBoC may offset higher tariffs by depreciating the yuan.&nbsp;</li><li>Short EURUSD – A move below 1.0500 seems likely.&nbsp;</li><li>Long AUDJPY – a risk on trade that should follow US equity indices higher</li></ul></li><li>Long Solano, Bitcoin or Ethereum&nbsp;</li><li>Long US2000 either as a straight directional trade or tactically vs short US30 or HK50</li><li>Long KRE ETF (US regional bank ETF)</li><li>Long US companies with low import exposure and high domestic sales&nbsp;</li><li>Long XOP ETC (S&amp;P Oil and Gas Exploration and Production) – Trump has suggested the US would produce a further 3 mbd of crude production.&nbsp;</li></ul><h2>Scenario 3 – Harris president / Split Congress (DEMs control the House / REP the Senate)</h2>The status quo scenario, with Harris unlikely to pass her proposed market-moving fiscal measures through the Senate. Here we see markets rapidly remove and reprice Trump tariff premium and revert to looking at the macro factors which were in play pre-election – the health of the US economy, nonfarm payrolls, and relative growth and interest rate settings.&nbsp;<h3>Trading expressions that align with a Harris win and a split Congress scenario&nbsp;</h3><ul><li>The USD initially trades lower across the board as any legacy tariff risk is removed.&nbsp;</li><li>US equity (all indices) initially trades lower but finds support as the status quo remains supportive of risk.&nbsp;</li><li>Long US 10-Treasury futures (USTN10YR) or the TLT ETF – while Harris’s key policies won’t pass through Congress, a divided Congress and a president who favours tax hikes is a bond-friendly outcome, at least for the long-end of the Treasury curve.&nbsp;</li></ul>Keep up to date with our research, daily market outlooks and videos on the <a href="/analysis/trade-us-election/" target="_self">Pepperstone US Election hub</a> – good luck to all.&nbsp;

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Trading the US Election - Tactical trades to play

Market participants crave an election outcome – it is an event many want out of the way, so they can trade their strategy without the noise and emotion that the election brings to markets. The outcome brings a degree of certainty, offering increased efficiencies to price how the winning party’s policies could affect economics and even the Fed’s monetary settings. <h2>The timing of the election matters </h2>If the US election does prove to be a volatility event for broad markets, then the timing matters for day traders and notably for those who refrain from carrying risk over when they aren’t in front of the screens and able to react. Mail-in votes will play a role in the timing of the results, and the numbers could be higher this election given recent weather-related disruptions. We should also consider that early voting has already started in some states and will be open to other states before 5 November. However, for those who choose to vote on 5 November, there is still the possibility of disruptions on the day. If the initial vote is close in individual states, just as we saw in 2020, then we may well see recounts and that may delay the result. Recounts and delays matter most in the 6 key battleground states – Arizona, Georgia, Michigan, Nevada, Pennsylvania, and Wisconsin. These are the states which will decide the election outcome, so any delays in knowing the outcome in key states such as Pennsylvania (PA), could impact the timing of the overall election result. Consider, that in the 2020 election once AP called the result in PA it gave Biden an electoral college majority and set him up to win. <h4>Time until the unofficial results were known in 2020</h4>

As we see in the table, in the 2020 election, most votes in the key battleground states were known within 24 hours, although the election wasn’t officially called until 2 days later 7 November – which inconveniently for many market players was on a Saturday. <h4>Key times – when the result was known in the past 6 elections</h4>

If we look at the past six US elections, 4 of these were called by a network on the 5 November between 11 pm to 2 am EST (6 Nov). Delays were seen in 2020 and 2000. As it stands, the betting markets imply Trump ahead in all key battleground states, except for Wisconsin. The RealClear Politics (RCP) average of all polls also shows a similar dynamic, although the majority in most are within the margin of error. <h4>US Election Dashboard – the shape of the race</h4>

In theory, the polls suggests another closely contested race, which does increase the prospect of recounts in certain states – however, if we don’t learn of an official outcome on the night of the election, the chances of it being known on 6 November remain high, and most political analysts see a reduced risk of a re-run of 2020. The other important factor to consider is the result of the Congressional vote, and which party controls the Senate and the House. While traders can price trade policy and tariff risk upon understanding who becomes president, the more outsized moves seen in the US bond market, the USD, oil and equity would be if Trump were to become president and the REPs win both the Senate and the House. A factor that is currently ascribed a 40% probability at present. For market participants understanding the election process, and subsequently when we may get the clarity to price the potential effects of policy, matters a lot. History may not repeat, but it can be a useful guide.

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Planning to trade the US Election – Timing the result

The potential for a re-run of the 2020 US Election, where just 43k votes in Georgia, Arizona and Wisconsin determined the election outcome, is fast becoming a real possibility. With the live debates now behind us, if voters haven’t already made up their minds, then the influence of relative ad spend, notably in the six key swing states, and any live events from Trump or Harris on the campaign trail may still resonate with any still ‘undecided’ voters. And, we may still get an ‘October Surprise’, where a controversial revelation involving one of the presidential candidates (or another member of the senior cabinet) could still make headline news. <h4>The US Election Dashboard – current expectations and polling</h4>

As we see from our US Election Dashboard, the RealClear average of the polls in the six key battleground states shows Trump ahead in Arizona, and Georgia, and tied in Pennsylvania. Kamala Harris is ahead in Michigan, Nevada and Wisconsin – considering that these are the states that will likely decide the election outcome, it’s no surprise that the betting markets price a roughly even probability in the race to the White House. Who becomes the president is obviously key, but Congressional control could also have a significant impact on the extent of any moves in financial markets. The makeup of the Senate and the House should be considered when expressing US Election trades, as the power dynamic in Congress could limit the smooth passing of many of the major policy initiatives (for both candidates). Again, the US Election Dashboard highlights that the Republicans (REP) are currently given a 71% chance of claiming the Senate (source; Polymarket), while the Democratic Party (DEM) are offered a 63% probability of taking the House. A split congress is therefore considered the current base case. A ‘Red Wave’ (I.e. the REPs claim the White House, Senate and House) is currently given a 30% chance of playing out. The odds of the REPs claiming the House (and therefore both chambers of Congress) would increase should Trump become president, and should it materialise would facilitate a heightened ability to pass Trump’s proposed policies and likely promote increased volatility across broad markets. A ‘Blue Wave’ or sweep (the DEMs claim the White House, Senate and House) is seen as less likely, where we currently see the betting markets giving this a 21% implied probability. With Harris’s agenda-pushing higher corporate tax rates, and capital gains (for those earning over $1m) with increased regulation on business, it’s fair to assume that in the lower probability of a ‘Blue Wave’ playing out that US equity markets and the USD would be negatively impacted. <h2>When will the US election become the dominant market theme? </h2>With rising geopolitical concerns, the Fed (and many other central banks) starting its easing cycle and China going hard on stimulus, it makes placing outright US election trades more challenging. Many of the tactical trades include markets affected by these macro dynamics, so expressing a view on how the election outcome and policy implementation could affect the corporate landscape, or macro markets is not a clear-cut exercise.

We can also see that media mentions and articles on the US Election have risen, as one would expect, but they are still well below the levels we saw in the lead-up to the 2020 election. When the US and global media focus myopically on the election, then I would assume traders will have far more confidence to trade tactical election trades. <h2>The key policies traders consider to be the most influential on markets </h2>Arguably the two policies which receive the greatest level of focus from market players are the respective polices on trade (tariffs) and tax. Fiscal stimulus and the deficit, immigration and regulation also get strong consideration from market players, but the debate on how tariffs and taxes could impact markets is front and centre. If we drill down into these two key policies, the proposed tax policy changes from both Trump and Harris seem conditional on the makeup of Congress. Assuming the DEMs claim the House, Kamala Harris will also need the Senate to pass her proposed 7pp hike to the corporate tax rate, and that seems highly unlikely. Assuming the REPs control the Senate, Trump will need the House to pass his proposed tax cuts. Given the current odds of the DEMs controlling the Senate, and REPs the House passing tax policy may be problematic. <h2>Trade tariffs are the key focal point for traders </h2>Trade tariffs are a very real proposition though, and while VP Harris has described tariffs as a “sales tax” and is keen to keep tariff rates unchanged, Trump has put tariffs at the heart of his campaign. Unlike the proposed tax changes, changes to trade policy and tariffs can be implemented far more easily. The key questions asked by market participants surrounding Trump’s proposed 60 percentage point (pp) additional tariffs on Chinese imports and 10pp additional blanket tariffs on all imports are: • Are the proposed tariff levels that Trump has campaigned on realistic? • If so, how quickly can they be implemented? • What sort of counter-response would we see from countries targeted by US tariffs? • What will be the potential impact on US inflation, as well as the impact on real consumption and corporate margins? • Could higher tariffs even lead to the Fed holding off from potential rate cuts given the expected lift in the price level? These are questions that can all lead to increased volatility in USDCNH, USDMXN, and EURUSD and potentially compel tactical traders into long/short (pairs) trades in the HK50/US2000, US500/US2000 and US importers vs domestic producers. Clearly, Trump’s tariffs policies are a net negative for market sentiment, but this should be offset by his proposed plans on tax cuts and deregulation and let’s not forget Trump views the US equity market as a referendum on his leadership and will champion equity markets higher. So, it's all to play for and we watch to see if polling shifts to offer one party a greater edge – should that happen, then we could see increased trends and volatility develop in markets, with traders holding increased confidence to express election trade. We update the US Election Dashboard daily, so stay updated with changes in polling averages and the betting market probabilities on our US election page.

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The Race to the White House: The Current State of Play

With the dust settling on the Trump vs Harris Presidential debate, it’s clear that the market saw this debate going to Kamala Harris. If some 28% of Americans wanted to understand more about Harris, well, they’ve probably seen enough to know that she can hold her own and stand toe-to-toe with Trump, and even though she got off to a nervous start, Harris ultimately affected Trump’s ability to execute the strategy his team would have implemented. This debate was never going to be an exercise in digging deep into the weeds and into the granularity of the respective policies, and we’re certainly not significantly wiser on that front. However, the undecided voters wanted to see how presidential Harris appeared and sounded and if she could be the strong leader that is needed for the position in question. I won’t give a view on the outcome of that question, as I don’t have a dog in this fight, but the wash-up is the prediction markets and betting exchanges have seen Harris’s odds of becoming President moving up 2 to 3ppt and now have her slightly favoured. Taylor Swift's endorsement of Harris is certainly not going to harm her chances in any capacity and would have possibly played a small role in the $45m in donations offered to the Harris campaign on the day – the third highest in the election cycle. The markets will now look for changes and trends in the polling, specifically in the 6 or 7 key battleground states, with Pennsylvania, and its 19 electoral college seats, seen as the deal maker.<h2>'Trump Trades' retreat as prediction markets move in favour of Harris</h2>With the prediction markets offering a loose guide to market players, we’ve seen price action evolve and a reduction in legacy ‘Trump trade’ positioning. Let’s also not forget that if Harris does ultimately get up, the less market-friendly tax hikes are unlikely to pass, as the Senate will highly likely go the way of the Republicans and so passing the more contentious policies will be problematic – that said, Harris is hardly campaigning on fiscal austerity and the Democrats record on the US fiscal deficit is even more extreme than Trump’s – at least in his three years before Covid. It was this exact time in 2016 and 2020 that both Clinton and Biden started to pull away in the national polls, so we look to see if history repeats this time around. Market players are well versed enough to know that what matters when looking at the polling is how the voting plays into the electoral college voting system. Looking at the timeline of future events, and while both candidates spend time on the campaign trail, one questions the likelihood of a second debate, as the Harris camp will be happy with the outcome and may refrain from going toe-to-toe again. So, we look to the VP debate between Walz and Vance on 1 October – again, this is unlikely to be a market mover, but given neither really hold back in their views, it could make interesting viewing.

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The Market Speaks Out: The Presidential debate goes to Kamala Harris

Traders will be on the lookout to see how these events impact future polls, and how changes in the polls influence the conviction of market players wanting to express US election trades.As we see in the US election schedule, we lay out a combination of political events that could influence voting intentions, as well as two important FOMC meetings – both have the potential to alter sentiment and our trading environment.

<h3>The optimal time to express US election trades</h3>As we opined in <a href="/analysis/navigating-markets/analysis-can-help-traders-through-the-US-election/" target="_self">“How technical analysis and price action analysis can help traders through the US election</a>”, one of the key factors when trading through the US election cycle is to consider the optimal time to express election trades. When we have a thorough knowledge of the market-impacting policies for both the Republican and Democratic parties, we can consider how certain markets may react to changes in the polling and the probability that these policies are implemented.Of course, the market itself is the best guide on how the collective is expressing their probability of an election outcome. So when the election becomes the dominant focus of market participants, we’ll see a clear reaction in markets to changes in the polls.

election becomes the dominant focus of market participants, we’ll see a clear reaction in markets to changes in the polls. 

<h3>Looking at when media interest in the US election picks up</h3>Sentiment in markets can be heavily influenced by social media and a broad array of news publications. In the November 2020 US election, it wasn’t until 23 October that we started seeing a truly noticeable pick up in articles mentioning the US election. It won't surprise that on the week of the election, the news flow was deafening.<h3>Total news articles containing “US Election” (weekly)</h3>

Total news articles containing “US Election” (weekly)

<h3>When has the financial market typically reacted?</h3>By way of a guide on US equity volatility, the 5-day average of the S&amp;P500 daily high-low price range spiked in early September to 90 points and stayed relatively elevated right through November.Looking at the VIX index (S&amp;P500 30-day implied volatility) as a proxy of equity volatility, it wasn’t until late October that we saw heightened implied volatility in the S&amp;P500, with traders buying portfolio protection and hedging equity risk, with the VIX index hitting 41% just before the election.In the 2020 election, it was USDMXN that became a default expression of Trump’s prospects of being re-elected President, with traders selling the MXN given Trump’s campaign policy to walk away from NAFTA

In the 2020 election, it was USDMXN that became a default expression of Trump’s prospects of being re-elected President, with traders selling the MXN given Trump’s campaign policy to walk away from NAFTA 

Looking at the daily chart in the lead-up to the US election, we can also see the 5-day average of the daily high-low trading ranges (red line) rising sharply from 18 September, before peaking in late September. We also saw strong buying interest from 18 September, with the pair rallying 9% as the polls shifted in Trump’s favour, before resuming its long-term downtrend.<h3>Considering market liquidity and the cost to trade</h3>Another factor that can lead to exaggerated price movement and higher trading costs is liquidity. Liquidity can take many forms, but in this case, I am looking at order book liquidity, and the ease to transact at the quoted bid-offer price. In 2020 top liquidity in the order books was well contained, with S&amp;P500 futures bid-offer spreads only noticeably widening in the week before the election.(S&amp;P500 futures bid-offer spread / mid-point)

(S&P500 futures bid-offer spread / mid-point)

<h3>Market interest should increase significantly after the Trump v Hariis live debate</h3>Instinctively, in this election cycle, markets may become more sensitive to polls and prediction markets post-US Labor Day (2 September) and perhaps even after the first debate between Kamala Harris and Donald Trump (10 September).The live debate could be influential in determining the voting preference for many of the ‘undecided’ voters that still remain. It may also influence any loose swing voters, notably if one candidate is far stronger than the other.The 1st live debate between the two vice presidents, Tim Walz (DEM) and JD Vance (REP), is scheduled for 1 October. This may not be as influential on voting intentions, however, given the strong views of the respective VPs it could result in engaging viewing.We then turn to the second live presidential debate between Trump and Harris due to take place in October, although at the time of writing no exact date has been agreed upon. One would expect that most of the undecided voters would have made up their minds on who they would be voting for by this point. However, if one presidential candidate slips up, or one is far more dominant than the other it could still be influential.<h3>Harris vs Trump - Who has the more market-friendly policies?</h3>While Trump and Harris are campaigning on very different policies, I can make the argument that Trump has the more US market-friendly policies. Granted, many see his policy on trade, with promises of 60% tariffs on Chinese imports/10% on all imports, as a net negative for sentiment. However, with promises of lower corporate tax rates, deregulating business and the full rollover of the 2017 Tax Cuts and Job Act, this may outweigh his trade policy.Kamala Harris is hardly campaigning on austerity and while she has talked about raising the corporate tax rate to 28%, a general continuation of current policy, with reduced uncertainty of trade relations and further deficit spending may not be that bad for risk. &nbsp;We shall soon find out which candidate’s policies the market sees as the most positive for risk – but the real question is when we see the market really start to trade the US election. Looking at how markets reacted in the lead-up to the 2020 election, and the schedule of events laid out above, markets may likely start to see increased volatility and range expansion from late September. Be prepared to react.

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The key dates of influence through the US election cycle

Making the right connections to the financial markets requires an understanding of the policies of both the Democratic (DEM) and Republican (REP) parties, and importantly which of these policies the market sees as the most impactful, either on the economy or on corporate profitability.<h3>Marquee market moving policies – Trump vs Harris</h3>

Marquee market moving policies – Trump vs Harris

<h3>Finding the optimal time to express election trades</h3>Traders then need to consider the most optimal time to express trades centred on the US election. If the US election is still many weeks away and geopolitical tensions rise, or we see US economic data truly deteriorate, then markets may reduce all sensitivity towards potential election outcomes, and market direction will come from these other sentiment-changing factors.Subsequently, the best time to express a view on the US election is when the news flow becomes the absolute focus of markets – where headlines noticeably drive price action, and we see US election news consistently as the headline article. It’s here where markets will show a limited reaction to economic data release (such as the <a href="https://pepperstone.com/en-au/learn-to-trade/trading-guides/how-to-trade-nfp/" target="_self">US non-farm payrolls</a> or <a href="https://pepperstone.com/en-au/learn-to-trade/trading-guides/how-to-trade-cpi/" target="_self">US CPI</a>) and myopically attempt to price potential changes to fiscal policy, trade and international relations, and industry regulation should the polls indicate a lead for either Trump or Harris.<h3>The current composition (Dems vs Reps) in the House and Senate</h3>

The current composition (Dems vs Reps) in the House and Senate

To make matters more complex, it’s not just who becomes President that could move markets – but the make-up of Congress could be hugely influential on market pricing too. If the elected President can’t pass the more contentious policies using executive orders and we see the DEMs take the House and the REPs the Senate, then a ‘split Congress’ will likely lead to gridlock. Subsequently, any reaction that could move a market from a specific policy will be far less empathetic.In a split congress, traders should consider which policies won’t pass in the current proposed form, while also considering which policies are simply campaign rhetoric. For example, Trump has suggested that he wants a say in the setting of monetary policy. The reality is that a loss of Fed independence would likely lead to a market meltdown, which, therefore, makes this proposal unlikely to play out.<h3>Thinking about how the broad market will interpret news</h3>Perhaps, the most important consideration when placing tactical election trades is not necessarily about how you interrupt a change in the polls and the probabilities of an election outcome. But how the collective view of all market participants sees these changes impacting the election, which, in turn, impacts market sentiment and pricing.Should we hypothetically see Trump pull ahead in the national polls, I may consider buying USDCNH (Chinese yuan) due to his proposed 60% tariff on Chinese imports. However, if most market participants decide to sell USDCNH because they are more concerned with the Trump/Vance preference for a weaker USD, or Trump’s desire to have a say on monetary policy, then my trade might be at odds with the collective weight of money and the directional flow at that time.My view on the connection between a political outcome and the impact on a market is irrelevant if the broad weight of capital doesn’t share that same view – I might ultimately be correct in the end, but if USDCNH trades lower, I’m now managing a losing position.<h3>Why technical analysis and/or a study of price action can simplify this process</h3>Where technical (TA) and price action (PA) analysis can be powerful as a method of trading the US election is to see it as a roadmap of all aggregated supply and demand, and importantly how the broad collective interprets the news flow. In most forms, neither TA nor PA is there to predict the future, but it helps shape our assessment of the probability of a directional move.

Why technical analysis and/or a study of price action can simplify this process

For more information on reading price action through candlesticks read <a href="https://pepperstone.com/en-au/learn-to-trade/trading-guides/candlestick-charts/">our trading guide</a>Traders don’t need to be well-versed in the keynote policies that each presidential candidate stands for – they observe how the market believes the election is playing out at that moment in time. It allows us to observe if there is truly an actionable signal to be had from a highly surprising poll, or if Trump or Harris has said something that traders feel will impress/upset the voters.<h3>Technical analysis looks for repeatable behaviours</h3>In many technical strategies, traders look for repeatable patterns and behaviours that offer a high probability that that action could play out again. Of course, as new news becomes known in the market then the conditions may change, and trends may reverse. However, by reacting to the flow of all capital the result can help us create strategies that increase our probabilities in a trade and that offer an edge.There is also a strong risk management element that TA and PA can solve. Traders can use various technical indicators to quantify movement in a market (such as the NAS100, gold or the USD). This can help traders understand the optimal level of risk to be taken in a trade (i.e. the distance to our stop loss) and subsequently help achieve the correct position size, relative to the volatility in the market at that time.The bottom line is that for many in the market the US election will be fascinating to view. However, trying to make money from this event takes skill, knowledge and an element of luck. By aligning with the collective wisdom in the market, you don’t necessarily need to follow the polls or correctly interpret how a speech from Trump or Harris has resonated with the American voting public.Learn to see the charts as a roadmap and think about the future in probabilities. Technical and/or price action analysis, when built into a robust framework and process can help cut through the noise and the emotion that comes with such a polarizing event.<h3>Pepperstone - offering cutting edge charting solutions</h3>Why not look at Pepperstone’s cutting-edge charting packages, trading tools, and EAs through our extensive range of <a href="/en-au/platforms/trading-tools/" target="_blank">trading platforms </a>and on mobile.

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How technical and price action analysis can help traders through the US election

We obviously don’t know what those conditions will look like, but it’s fair to assume that the closer we get to the election we could see reduced liquidity in markets, expansion in the daily high-low trading ranges and increased broad market volatility.<h3>Moves in the VIX index &amp; S&amp;P500 futures into the 2020 US Election</h3>

Moves in the VIX index & S&P500 futures into the 2020 US Election

There is no one-size-fits-all guide as to how automated trading systems/EA’s (Expert Advisor) operate through the fluctuations in price, volatility and trends into the election – that is determined by the objectives of the trading system, the strategy the trading system is executing, the timeframe it typically operates in, and the market(s) it trades.Regardless of the considerations, robust backtesting involves testing a strategy over the longest data set possible - the greater the sample size, the increased diversity and variance in the underlying market conditions the test captures.Some will say that because the US election occurs so infrequently the sample size of US elections within a data set isn’t statistically significant. In turn, the US election is an outlier event that invalidates the backtest when evaluating the performance of the trading system/EA through the election cycle.I would look at it differently.Given the role of technical and price action analysis is to find repeatable patterns and behaviours and to execute when we see high probability outcomes and set-ups - if we have a diverse enough range of market cycles, trends and volatility regimes captured in our backtest, essentially, we should see the US election as just another period within a data set.<h3>Automated trading is about reaction not prophesising</h3>In theory, automated/EA traders shouldn’t care about or be influenced by the underlying cause of market movement but focus fully on how the system performs in the underlying market and trading environment. If prior elections have resulted in extreme volatility and violent reversals, choppy price action or trending conditions (high or lower), the system (EA) should account for that and only execute trades that have an edge in whatever the underlying conditions are at that time.<h3>Liquidity and volatility impact the environment in which we operate</h3>Automated traders should also be aware that as we get closer to the US election it will not just be the volatility in markets that can change, but also the liquidity in the order book may evolve too, and this can see changes in an instrument's bid-offer spread, and result in a higher cost to trade.Reduced liquidity in markets may then result in exacerbated moves, where large orders can be more impactful on the price action.<h3>Be dynamic to volatility</h3>Many of the more sophisticated automated trading systems have rules that are dynamic to the volatility in price and the underlying movement in the market at that time. This is prudent and recommended, as the risk we take in a position (i.e. the distance to the stop loss) should align with the volatility in the market, with the position size dictated by the additional risk taken.

For example, if the 2-day ATR (Average True Range) is more than 1.5x its 20-day ATR, then this may see the system look to enter a new position with a wider stop loss (from entry). Subsequently, the position size taken would be reduced from what it may typically be in a lower volatility regime – that is if the system is to take trades in this environment at all. &nbsp;<h3>Automation removes emotion and reacts to the collective wisdom of the market</h3>Another factor that is core to most automated strategies is the complete removal of news as an input. While discretionary traders will likely be influenced by the emotion that can stem from changes in the election polls and the prediction markets and will need to astutely consider what is signal and what is noise, automated trading systems react solely to the aggregated flows and the behaviours that collectively drive price and are the consequence of news.There is no assessment and interpretation of how election news should impact markets. What matters is the change in market conditions in which the trading system operates.<h3>Turning off the strategy in higher volatility periods</h3>There are traders who will consider temporarily turning off their automated trading system as we approach the US election on 5 November. This is understandable as the US election news flow will be deafening, and many of the opinions that influence can be heavily biased. The emotional pull that the news cycle can invoke can be very powerful and can create irrational behaviour, especially if we start to see higher volatility across markets.For a more detailed understanding and a primer on the US election, see our <a href="/analysis/2024-us-presidential-election-primer/" target="_self">US election primer</a>.Automated/EA traders who have full confidence in their system and the validity of the backtest will refrain from taking a discretionary view to turn off or tweak the system. They would have faith that if the conditions do change the system would only take trades that are triggered by the rules of the system.<h3>Trading automated systems with Pepperstone</h3>Building trading systems, either fully automated (EA) or systematic, and executing strategies that execute on mean reversion, momentum, trend, scalping or swing strategies, can offer real advantages for those willing to put the work in, and for those who perform a robust and rigorous backtest without curve fitting and bias.In times of extreme emotional influence, automated trading systems can keep traders out of the market when the conditions and setups are not there and will only execute when a high-probability signal presents itself.One thing is clear though, the US election has the potential to drive volatility and lift correlations across markets, so this needs to be a consideration for the inputs into the systems rules.<h3>Automated trading and backtesting strategies with Pepperstone</h3>Traders can backtest, optimise and evaluate the efficacy of a trading strategy using the ‘Strategy Tester’ on MT4 and MT5, with backtesting functionality also available on cTrader and TradingView.