Pre Asia open: The Trump bump

Incumbent Congressman Eli Crane, representing Arizona's second district, clinched re-election this past Saturday, pushing the Republican party closer to the 218 seats they need for a majority in the House. This win brings the GOP up to 213, setting the stage for a potential Republican-led House of Representatives.

For traders, the U.S. election has always looked like a binary event: Trump wins, stocks soar, yields climb, and the dollar strengthens. But with the possibility of a complete red sweep—ushering in unified control over the levers of power—it's the kind of scenario that could give birth to the “ Red Sweep at Night, Traders Delight” scenario where the Trump Trade extends.

That said, there are still plenty of uncertainties about how the campaign rhetoric will translate into actual policy. The lean is toward tax relief, which could stimulate growth, but it’s not all smooth sailing. The flip side of the Trump playbook is higher trade tariffs and geopolitical uncertainty, plus a firmer dollar and higher bond yields. These shifts are largely driven by ballooning budget deficits, increased inflation risks, and possibly less dovish action from the Federal Reserve than markets had initially expected.

As expected, the "Trump Bump" was in full swing last week—though by week's end, its impact began to fade across bond and currency markets. Yet, the rally has unfolded like a tale of two markets. For some, the celebration ended early, but for others, the party is still very much alive.

The real story here is in the small-cap and financial sectors, where optimism driven by the election results has been a major catalyst. Small businesses, which thrive in a pro-growth environment, are feeling the boost, and financials, with their love for deregulation, are in full stride. The Russell 2000 had its best week since April 2020, and the bank index saw its most robust performance of the year. Fueled by MAGA-driven enthusiasm, these sectors are clearly leading the charge while other parts of the market take a breather.

As for what lies ahead, it’s hard to ignore that the market is gearing up for a continued rally as we approach Inauguration Day. If the bond vigilantes—those hawkish traders who keep a sharp eye on interest rates—don’t stir the pot too much, the S&P 500 could quickly charge toward the 6,500 mark. The bond market has been holding steady for now, but any signs of a shift could stir things up, so keep an eye on that long end of the Treasury curve.

In the meantime, the mood is optimistic. For President Trump, the focus will likely be on keeping things smooth—this rally is too sweet to disrupt. Instead of throwing curveballs like talking up tariffs, expect him to keep Wall Street happy with tweets of pro-growth moves like tax incentives and deregulation. The market is counting on these sweeteners to keep the momentum rolling.

Then there’s the dry powder—money market funds are sitting on a mountain of cash, just waiting for the right moment to pour into equities. That moment could come in the form of a big pre-inauguration rally, provided Treasury volatility doesn’t throw a wrench in the works.

So, while some pockets of the market may be cooling off, the broader trend is clear. The rally is alive, and with five consecutive weeks of inflows (and seven in the last eight), financials and small-caps are driving the bus. The post-election optimism is still charging forward, and it doesn’t look like the party’s stopping anytime soon.

Right now, and too unexpectedly, analysts are all on the same page: Trump 2.0 means tariffs, tighter immigration, and tax cuts, and that’s supposed to ignite a "U.S. inflationary boom" while triggering a "global deflationary bust." So, what does that lead us to? The obvious play: load up on gold, the dollar, U.S. stocks—tech names—and small-cap “barbell” positions, while shorting Treasuries. It’s the consensus trade, and naturally, everyone’s piling in.

But what if we’re missing a twist? What if Trump 2.0 doesn’t follow the script? What if he manages to juggle his expected inflationary cocktail—tariffs, tax cuts, and immigration tweaks—with a disinflationary curveball? Imagine a new blend of policies—deficit discipline, deregulation, and a surprise turn toward peaceful geopolitics.

Could it be that he’s aiming for a new persona? Peace Man Trump is looking to leave behind a legacy of economic growth and global diplomacy. Maybe, just maybe, he’s hoping to catch a Nobel Peace Prize to add to his resumé. It sounds wild, but stranger things have happened in politics—and the markets might be sleeping on this potential plot twist. We could look at entirely different market dynamics if he can pull off a more measured, less volatile approach.

So, what if this isn't just another round of Trump-driven chaos but a more nuanced, balanced approach that could send the markets in a different direction? It's something to consider, especially if the consensus play starts looking overcrowded.