Echoes Of Brexit
On a morning that echoes strongly of the day after the Brexit vote, polls and betting markets are once again left red-faced as against Donald Trump takes the US Presidency.
Markets responded aggressively to the news with the S&P500 dropping over 120 points as risk aversion swept across markets. The initial whipsaw reaction also saw the US Dollar crashing lower also, notably against traditional safe havens the Swiss Franc and Japanese Yen.
The Mexican Peso cratered sharply as expected with USD spiking to fresh highs. The Peso has been highly traded over the duration of the Presidential elections with many forecasting severe weakness for the South American currency as a consequence of Trump’s proposed policies which include heavy import tariffs on the country who export around 80% of their goods to the US.
Across the G10 space, the US Dollar strengthened against the commodity complex which was hit hard by the risk-averse reaction to the news. Whilst the dust settles and market recalibrate following the initial reaction; there are three key areas which will be important for determining the medium term outlook for capital markets.
Key Factors To Watch Now
There are three key focal areas for markets in the short term; The tone of Trump’s rhetoric, incoming data, The Fed.
Trump’s tone: Over the course of the election campaign Trump was notorious for his polemic, extremist and sensationalist soundbites. Much of Trump’s campaign was built around grabbing media attention on controversial views. To some extent, this approach has to be viewed as a strategy employed by an outsider candidate looking to steal the limelight.
Now that Trump has won the Presidency once of the first aspects that will influence markets is the tone of Trump’s rhetoric. In short, will Trump now moderate his views and his adopt a more neutral, Presidential attitude or will he continue to shock and divide with his controversial rhetoric?
In the speech that Trump gave to announce that Sec. Clinton had formally conceded Trump immediately adopted a far more diplomatic tone thanking Clinton for her service to the country and telling America that it was time to “heal the wounds of division” and that he would be a “President for everyone” seeking “common ground, not hostility”. The speech was far less controversial than many were expecting and markets reacted accordingly with both the S&P and the Dollar recovering lost ground. Whether this truly represents a change in Trump’s attitude now that he is President, remains to be seen, but for now, markets are relieved that the fire branding has stopped.
Data: The likely economic impact of a Trump presidency has been hotly debated with some analysts forecasting that Trump’s proposed protectionist policies will ultimately damage the US and lead to lower growth whilst others note that Trump’s proposed tax cuts and increased fiscal spending could, in fact, strengthen America’s position.
Markets will be paying close attention to incoming US data to measure the initial impact of Trump’s election. However, the first business confidence surveys (Markit PMIs) will not be in until the week of November 21st. For now, investor uncertainty will remain elevated as markets await Trump’s next steps.
The Fed: In the wake of Trump gaining the Presidency and the period of heightened uncertainty that is likely to persist in the short term, it seems reasonable to expect that the Fed will not raise rates in December. Furthermore, markets will now be looking for reassurance from Fed Chair Yellen that she is not going to resign, ensuring policy continuity. Trump has been highly critical of her term during the course of his campaign.
In terms of the US Dollar, there is clearly a conflict between the downward pressure of reduced Fed rate hike expectations, elevated uncertainty and the risk premium on US assets versus the positive prospects of a Trump presidency such as increased fiscal spending and tax cuts. What is clear at this stage is the negative impact on EM currencies which will be weighed down by risk aversion in the near term and the prospects of higher US yields in the medium term.
For developed markets, the conflict between reduced Fed rate hike expectations and a more positive medium-term fiscal outlook should see commodity currencies continue to be pressure by risk aversion which should support EUR. USD strength against commodity currencies will be offset by USD weakness against safe haven currencies.