M6E: Staking an Opinion on the US ElectionCME: Micro EUR/USD Futures ( CME_MINI:M6E1! )
All eyes are on the November 5th U.S. presidential election. The stake can’t be higher. A bad outcome could lead to reshaping the balance of world power, an escalation of the geopolitical crises underway, and disrupting the social stability in the U.S. and beyond.
Here on TradingView, I want to address this question: How would the U.S. election impact financial investment?
A Lookback from the 2022 U.S. Midterm Election
On August 17, 2022, I published “Market Impacts of the US Mid-term Elections, which broke down the possible election outcomes into two categories:
• “One-Party Rule”, where Democrats controlled the White House and the Congress
• “Divided Government”, where Republicans retook either the House or the Senate and created effective challenges to the Administration’s political agenda
I analyzed how each asset class would fare under these two scenarios. My conclusion was that the four mega spending bills passed in the first two years would pump $4 trillion in the U.S. economy and would pop up the stock market. At the time of that story, the S&P 500 stood at 4,264. Last Friday, it settled at 5,808, up 36%.
Prediction Markets, Opinion Polls and the DJT Stock
With the upcoming election, my main question can be broken down into two:
• What asset class would fare well if Trump wins?
• Would there be any investment instrument help us express our market view?
What if Harris win? The election is a binary option with only two outcomes. We could combine them in one question with Yes or No answer. A No for Trump is equivalent to a Yes to Harris.
To start our analysis, we need to assess the winning odds of each candidate. Many data sources exist to help. Each tells a part of the story, but all have their own flaws. In my opinion, the prediction markets are preferrable to opinion polls. Millions of people wager on the election outcome on Polymarket, with the money pool amounting to $2.5 billion. This is a real deal as people put money where their mouth is.
Currently, Polymarket predicts that Trump has 65.1% odds of winning the election, where Harris has a 34.9% chance. How does it work?
• If you believe in Trump, you could put down 65 cents for a recreational bet to vote Yes. When he wins, you get $1 back, and if he loses, you lose the bet.
• If you are in favor of Harris, you could put down 35 cents to vote No for Trump. You also get $1 back if Harris wins and will say goodbye to 35 cents if she loses.
Many readers are not comfortable with an “All or Nothing” trade and may not be allowed to participate in a betting market. Fortunately, there are investment-graded alternatives. Trump Media & Technology Group Corp ( NASDAQ:DJT ) is a publicly traded company listed on the Nasdaq market. Its main owner is Donald J. Trump with an 84% stake, and its main asset is TrueSocial.
My hypothesis: DJT stock price shall move up (down) along with the rise (fall) of Trump’s winning odds. With so many unprecedented events happening, we should be able to validate this assumption easily.
Let’s look back in the campaign timeline in the past four months, and see how Polymarket and DJT stock price responded to these events:
(1) On June 27th, the first presidential debate took place. It’s generally viewed that the current President performed poorly against his opponent. My rating: Positive on Trump
• Polymarket: Trump’s odds increase from 59.5% to 67.0% (+7.5%)
• DJT: Stock price moved from $25 to $39 (+56%)
(2) On July 13th, an attempted assassination on Donald Trump wounded him and killed a bystander in Pennsylvania. Rating: Strong Positive
• Polymarket from 59% to 71% (+12%) and DJT from $29 to $41(+41%)
(3) On July 24th, President Biden withdrew his presidential candidacy. On August 3rd, Kamala Harris became the Democrats nominee after a roll call to party delegates secured a majority vote. Rating: Negative on Trump
• Polymarket from 62% to 45% (-17%) and DJT from $41 to $21 (-49%)
(4) On September 10th, the second presidential debate with Trump and Harris took place. Many viewed that Harris performed better than expected. Rating: Negative on Trump
• Polymarket from 52% to 49% (-3%) and DJT from $18 to $12 (-33%)
(5) On October 20th, Trump worked a shift in a McDonald’s in Pennsylvania, making fries and handing out food to mobile customers. Rating: Very Positive
• Polymarket from 55% to 65% (+10%) and DJT from $20 to $39 (+95%)
The above analysis shows that DJT is positively correlated to the Polymarket winning odds. Therefore, we could use DJT as a stock market proxy for Trump’s chance of winning the presidential election on November 5th.
For anyone owning a stock brokerage account, he could give his approval to Trump by buying DJT. Harris became presidential nominee in less than 3 months, and there isn’t a stock symbol closely linked to her. Therefore, for anyone leaning towards her, he could deliver a disapproval to Trump by shorting DJT.
DJT Correlation with Other Financial Instruments
Keep in mind that DJT is a single stock with very volatile prices. Its low market valuation opens DJT vulnerable to stock manipulation. A prudent investor may want to consider other assets that move in line with DJT but are less volatile.
I looked into a number of financial instruments. Here is what I founded:
US stock market indexes Dow Jones, S&P 500 and Nasdaq 100 have no correlation with the stock prices of DJT
Gold and Bitcoin have no correlation with the stock prices of DJT
US Dollar Index is positively correlated with the stock prices of DJT, while the Euro-USD Exchange Rate is negatively correlated with the stock prices of DJT
Let’s focus on the ones with statistically significant correlations. The dollar index moved in line with Trump’s winning odds. Investors are not necessarily in favor of a Trump win. In my opinion, his America-First policy would help uphold the value of the dollar. Meanwhile, an untested Harris administration means more uncertainties to dollar investors.
The Euro-USD is negatively correlated with DJT because of the quoting convention in the FX market. Quoting as number of dollars per euro, dollar appreciation means that each unit of euro could buy fewer dollars, resulting in the declining exchange rate quotation. The opposite also holds true.
Trade Setup with the Micro Euro-USD Futures
Like trading DJT, a trader could express his political opinions in this election using CME Micro Euro-USD futures ($M6E). M6E contract has a notional value of 12,500 euros. Buying or selling one contract requires an initial margin of $280.
The December contract (M6EZ4) was settled at $1.0817 last Friday. At the current price, each contract is valued at $13,521.25. The M6E contract is very liquid, with a daily trade volume of 18,096 and an Open Interest of 14,375.
Along the line with our preceding discussion, possible trade setup are as follows:
• A Trump victory could strengthen the dollar, leading to a decline in M6E quotation. Therefore, a vote for Trump could equal to a short position in Micro Euro-USD futures.
• A Harris victory could weaken the dollar, leading to an increase in M6E quotation. A vote for Harris is a No to Trump, which could equal to a long position in M6E.
I do not attempt to sway anyone’s vote to one direction or the other. Both views could find application using M6E. Unlike Polymarket, trading futures is not an All-or-Nothing bet. If you are wrong, you may incur losses in the trade, but not necessarily lose everything.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
