Strategic Futures Trading During US Election Week

04 Nov 2024

By Danish Lim, Senior Investment Analyst for Phillip Nova

 

In what seems like a coin-toss election, Donald Trump and Kamala Harris are blitzing through swing states to make their final pitches to voters in the campaign’s final days, with polls signalling no clear winner. Latest polls have them tied at around 49% each. Another poll showed Harris with a 47%-44% lead in Iowa.

 

Source: Bloomberg, 4 November

 

It should be noted that results may not be finalised on election night, as some states including Washington DC do not begin counting ballots until polls close and some states will tally votes more quickly than others. In 2020, the results were announced four days after the election; while in 2016, Hillary Clinton conceded to Donald Trump just the morning after the election. A delayed election result could raise volatility across asset classes.

 

Additionally, right off the heels of election day will be the November FOMC meeting on 8 Nov at 03:00 SGT, where the Fed is expected to cut rates by 25bps.

 

Insights:

  • Volatility tends to rise prior to Elections

The most predictable outcome would be more volatility. Across the past 7 elections, the VIX typically sees an increase of about 26.65% in October, the month before the elections, before declining on average about -12.53% in November as volatility subsides post-election, as seen in the seasonality chart below.

 

Source: Bloomberg, VIX seasonality chart, 26 September

 

  • Election Impact on the S&P 500

Reviewing S&P 500 performance going back to 1992 as seen below, we see that the S&P 500 averages a 2.45% decline a month before the election, while eking out a 0.35% and 0.83% gain in November and December respectively, post-election.

 

Source: Bloomberg, S&P 500 Seasonality Chart Election Years, 26 September

 

Source: Bloomberg, S&P 500 Seasonality Chart Election Years, 30 September

 

Overall, the S&P 500 saw an average gain of 1.15% in election years since 1992. Election years have generally been good for the US stock market, with the S&P 500 having risen in almost every election year since 1992, the exceptions being 2000 and 2008, which were marred by economic recessions.

 

Thus, unless the economic backdrop sees an abrupt change, we remain constructive on US equities post-election.

 

Trump Victory:

  • Trump proposed to lower the corporate tax rate to 15% from 21%.
  • 10%-20% across the board tariff, and 60% on Chinese-made goods. Could have inflationary impact.
  • Beneficiaries: Financials under looser regulations (Bank of America, Goldman Sachs), Oil and energy companies (Baker Hughes, Exxon Mobil, ConocoPhillips), Defence (Lockheed Martin, Northrop Grumman), Prison (Geo Group) and Gunmakers (Smith & Wesson), Crypto stocks (Coinbase, Marathon Digital, Riot Platforms). Trump Media & technology Group
  • Companies with high exposure to China could face pressure if trade tensions escalate. Including Qualcomm, Marvell, Materials companies like Celanese Corp, and Industrials like Otis Worldwide Corp.

 

Harris Victory:

  • Harris proposed for an increase in corporate tax rate to 28%, as well as higher rates for higher income earners.
  • Campaign messaging suggests that Harris also will take a tough stance against China, although to a lesser extent than Trump
  • Beneficiaries: Renewable energy producers like First Solar, Sunrun), EV makers (Tesla, Rivian, and Lucid), and EV-charging network operators (ChargePoint Holdings, Beam Global, Blink Charging Co). Homebuilders (DR Horton, Lennar, KB Home), Cannabis (Tilray Brands, Canopy Growth)

 

FTSE China A50 Futures:

Source: Bloomberg, 4 November

 

The FTSE China A50 Futures appears to be in consolidation, amid stimulus uncertainty and a shaky economy.

 

When compared with the Mini H-shares Index Futures, we observe a high correlation of around 0.83 over the past 2 years. However, the A50 is typically seen as less sensitive to geopolitical tensions as A-shares generate a majority of their revenue domestically.

 

Source: Bloomberg, 4 November

 

Looking at the ratio between the FTSE China A50 Futures and the Mini H-shares Index Futures, we are able to discern a mean-reverting pattern based on a Bollinger band, as seen above.

 

Thus, we think that election season volatility presents an opportunity for the ratio to be pushed into overbought or oversold territory temporarily before reverting to the mean. The ratio is currently -1.7 standard deviations below the mean.

 

Source: Bloomberg, 4 November

 

Futures Playbook:

In our view, the market can perform well through year-end whether Harris or former President Trump wins the election. Fundamentals are solid and historical trends are favourable for the stock market post-election.

 

However, a Trump win could also result in near-term market volatility due to the inflationary impact of additional tariffs, as well as increased debt and deficit spending. On the other hand, a Harris victory could weigh on markets due to higher taxes and additional regulations

 

As mentioned earlier, we think that heightened volatility is likely in the near-term. Such volatility could result in short-term swings that present attractive opportunities for mean-reversion trades.

 

  • Long CME E-mini S&P 500 Futures

We favour going long the CME E-mini S&P 500 Futures based on the historical trend of US equities gaining post-election.

 

  • Long FTSE China A50 Futures (CN), Short Mini H-shares Index Futures (MCH)

We favour going long the FTSE China A50 Futures and shorting the Mini H-shares Index Futures. We believe the A50 is less reactionary to US election volatility as onshore A-shares are less impacted by trade tensions with the US. Thus, in the event of heightened volatility post-election, we see the Mini H-shares Index Futures seeing greater price action than the A50, which will impact the spread ratio in the near-term.

 

If the ratio trades 2 standard deviations below the mean, we favour going long on CN and shorting MCH, vice versa.

 

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We’ve done the heavy lifting for you. With our new “US Election” category, Phillip Nova 2.0 provides a carefully curated list of products across different asset classes likely to be impacted by the election. Whether you’re interested in energy, financials, tech, or renewable sectors, this feature enables you to identify trading opportunities that align with potential political outcomes. To access the new curated category, head to your Watchlist>+Add>click on the “US Election” category.

 

Where the new US Election category is located.

 

Products available in the new curated category.

 

Phillip Nova 2.0 gives you the tools to stay ahead of election-driven market shifts and make informed trading decisions with ease.

 

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An Exchange Traded Fund (ETF) is a marketable security that is formed to track nearly anything, ranging from a specific index, sector, commodity, or increasingly, theme. They are most commonly used to track a basket of stocks, and can typically be accessed through the same channels as regular stocks. ETFs are typically separated into passively-managed ETFs that simply mirror the security they are tracking (e.g. the STI), and actively managed ones that attempt to deliver higher returns or specific investment objectives, often with a pre-specified theme in mind (e.g. ARK Invest’s Innovation ETF).

Why should I trade in ETF CFDs?

  • ETFs have been growing in popularity over the years. 2020 was the best year for ETFs yet, with global equity ETFs seeing more than $1T in inflows within a 12-month period. Using CFDs to gain exposure to ETFs allows for greater capital efficiency because only a portion of the contract value is required as margin to establish a position.
  • ETFs are particularly popular with investors seeking a relatively hassle-free investing experience, while desiring exposure to a range of specific and relatively understandable securities. Trading ETF CFDs brings greater convenience by eliminating the need for traders to hold multiple currencies in order to access global ETFs.
  • An investor wanting exposure to the post-pandemic economic recovery could open a position in the well-known SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500. Another investor that may be convinced of the future importance of Environmental, Social and Governance concerns (ESG) may find the increasing selection of ESG-themed ETFs that track a basket of high ESG-rating companies to be a good investment, rather than cherry-picking individual equities by hand. ETF CFDs can act as a powerful tool for traders can profit from both directions of the market by taking on long or short positions.

A look at two ETF CFDs we offer:

1) Has the ARKK been sunk?

ARK Innovation ETF (ARKK) ARKK is an actively managed ETF by ARK Invest that invests in a range of companies based on their innovative and industry-disrupting potential. ARKK’s largest holdings are in companies such as Tesla, Square, and Zoom. ARKK is down around -33% from peaking on 12th Feb and is currently in the red for the year to date as the market experiences a risk-off outflow of funds. Superstar fund manager Cathie Wood has however been consistently doubling down on her bets, buying even more shares in growth stocks that are going through their own tumultuous periods such as DraftKings, Peloton, Teladoc, and Tesla. In her view, ARKK is playing the long game, and remains steadfastly convinced in the long-term prospects of these growth stocks beyond this current bout of volatility. Similarly on outflows, investors are still betting big on ARKK as ARK Invest has only lost about $1.2B in assets this year across all its six funds, compared to seeing an inflow of $15.1B during the same period. Recently, investors have been nervously eyeing ARKK’s basket of tech stocks as their future earnings potential remain vulnerable to erosion through high inflation – the dominant concern of the market in recent weeks. As commodities – the major contributor to the recent heightened inflation fears – drops sharply from record highs, are investor concerns over hyperinflation overblown?

2) Searching for exposure to Asian equities?

iShares MSCI Asia ex Japan ETF (AAXJ) The AAXJ is currently trading -10.6% adrift of all-time highs seen in February, giving up gains in tandem with an Asia-wide equity sell-off at the time. Given that slightly over 40% of the ETF’s holdings are based in China, the ongoing tumult seen in Chinese equities currently have carried over nearly perfectly in the AAXJ, as Chinese investors take a breather after the stellar gains made over the past year. Looking ahead, Asia – and particularly China, is steaming ahead with its economic recovery. China is widely expected to be one of the best-performing major economies this year, providing a major boost to the outlook for corporate earnings. As the rest of Asia and the world gradually opens up their own economies, AAXJ is likely to again benefit from strong Asian outperformance amidst a strengthening trade outlook.

CFD is available for trading on Phillip MetaTrader 5 (MT5).

Features of trading CFD:

  • Trade in both the bull and the bear markets
    The ability to enter a long and/or short position allow traders to take advantage of both rising and falling markets.
  • Smaller barrier to entry
    Flexible and smaller contract sizes. This means that traders will be able to enter into a contract with a modest amount of capital.
  • No expiration date or risk of delivery
    Unlike futures which commonly have a fixed expiration date, CFD allows traders to perpetually hold the position(s). CFD is cash settled, no need to worry about the delivery of the underlying asset.

 

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