It has been a week since the American presidential elections where the Republican candidate Donald Trump was elected to be the 45th President of the United States. Donald Trump defeated Democratic nominee Hillary Clinton and is scheduled to take office on January 20, 2017 in what has been perceived as one of the biggest shocks in contemporary American political history.
Trump's victory was captivated in momentous media reactions and social media turmoil, resulting to a massive impact on global markets as well, after Trump defied almost every national and state poll.
Source: The New York Times
This article attempts to delineate how the global markets reacted upon the election results and to provide a lucid portrait on the market arena a week later.
On the night of the 8th of November and once Donald Trump started gaining ground during the vote counting, the U.S. stock markets plunged with futures on the Dow Jones Industrial Average falling 506 points, or approximately 4%. On the European front, the stocks in London witnessed a plunge of 2%, after futures indicated losses as high as 4%, while the Hang Seng Index in Hong Kong fell 2.7%. The South Korean Kospi tumbled 2.5%, the Japanese Nikkei 225 experienced a 5.1% decrease while Australian and New Zealand markets also fell on a parallel basis.
On the other hand, there are a number of assets that traditionally experience increase in value, during phases of market turmoil and political uncertainty, such as the U.S. dollar, gold, and government bonds. For instance, gold mounted $41 to $1,316 per troy ounce, a figure translating to over 3.2%. Investors were clearly inclining towards the safety of government bonds since the ten-year U.S. Treasure note yields were reduced by 12 basis points to 1.73%.
In currency markets the euro fell by 2%, while the Japanese yen fell 3%. An indicative example of how some currencies were depending on the outcome of the American presidential elections was the Mexican peso, which underwent a significant fall. On Tuesday, as Hillary Clinton showed strength in early voting, the peso rose to its highest figure in two weeks. However, it plunged over 13.07% after midnight when CNN announced the electoral vote of a number of key states who favored Trump.
Convergex, a New York-based brokerage agency reported that ETFs (exchange-traded fund) were trading almost three times more on Wednesday, the day after the election, than on Tuesday while generally the share trading experienced 50% rise, according to Chief Executive Eric Noll. Mr. Noll highlighted that "In times of market stress, traders and institutions have to adjust their portfolios quickly. The easiest way for people to refocus their portfolios without picking individual stocks is ETFs" and added that they have seen this trend rising over the past couple of years but at the moment is "really picking up steam".
After Donald Trump's victory, almost 3.2 billion shares of exchange-traded funds switched hands on Wednesday, a number more than double the normal volume. Traders and investors were placing bets via ETFs on markets projected to be influenced by the new President's regulations and trade policies. Mr. Trump had promised to repeal financial regulations imposed by the Dodd-Frank Act, a move that boosted trading on Wednesday in State Street Global Advisors' Financial Select Sector SPDR Fund to $5 billion, the highest figure in five years. According to FactSet, a multinational financial data company, Trump's assurance to extinguish the Obama administration's Affordable Care Act triggered $756 million of investor flows into the iShares Nasdaq Biotech ETF on Thursday, the highest number ever recorded in the fund's history.
Moreover, the eagerness of the new President, at least during his pre-election campaign, in limiting immigration and trade with Mexico and build a wall along its border sent volume in the iShares MSCI Mexico Capped ETF to a record 17.6 million shares one day after the elections as the fund fell 8.5%. Trading had remained in high levels for the rest of the week and the double-leveraged ETF ended the week up 22.5%.
Source: FactSet – The Wall Street Journal
A week after the presidential elections, the decline in bond prices has continued. In United States, the 10-year government bond yield increased above 2.26%, the highest level since the end of 2015, while the 30-year bond yield reached 3%, at the same time where treasuries kept performing worse than many other bonds. Although yields are overall rising, the emerging markets and the euro-zone countries are witnessing large trading volumes. Additionally, the equities have been quite increased around the globe however, still in insignificant numbers.
Furthermore, gold rose yesterday, ending a three-session losing streak. Spot gold added 0.5% to $1,226.06 an ounce by 1008 GMT, having fallen on Monday to its lowest since June at $1,211.08. US gold futures rose 0.2 % to $1,224.30. ETF Securities commodities strategist Martin Arnold has stated that "Gold is taking back some of the negativity that we have seen over the past week. Although investors are becoming more risk-on, there is still a lot of uncertainty surrounding economic policy in the United States" and added that "There have been lots of statements of US policy, but we don't have details and we don't know what it looks like. That's fertile ground for gold."
On another note, the boosting gold was an approximate 5% fall in the dollar index, which measures dollar against six other leading currencies. The index dropped from 11-month highs to 99.663. Among other precious metals, silver rose 0.8% at $17.02 an ounce, having recorded its lowest since June at $16.61 in the previous session. Platinum rose 0.9% to $939.75, recovering from an eight-month low of $917.50 witnessed on Monday. Palladium decreased by 0.9% at $704, having earlier hit its highest since October at $702.50.
Due to the policies and regulations that the US President-elect is anticipated to undertake, the inflation expectations continue to grow as well as expectations of higher interest rates. Mr. Arnold stated that the market "sentiment is being compounded by the very high probability of the US Fed raising interest rates in December". Donald Trump is expected to cut taxes thus increasing the country's budget deficit, while his intention in spending more on infrastructure and defense in a period where the American economy has still little prospect is causing anxiety in economies worldwide. Under these circumstances, the Federal Reserve is not anticipated to tolerate a significant increase in inflation. Markets are expecting rate increases multiple times over the next 18 months while they are currently estimating that the Federal Reserve funds rate will be 50 basis points higher than it currently is by the middle of 2017. Mark Cabana, head of U.S. short rate strategy at Bank of America Merrill Lynch thinks that "there's a fundamental rethink in the near-term outlook, as it relates to expectations for growth and also (Federal Reserve) policy. All of this has to do with increased optimism that there will be some fiscal stimulus in the near term and some type of deregulation, both of which will underpin growth".
All things considered, it is astonishing how in a moment, the world has shifted for bond investors, savers and borrowers. For financial institutions, it's a major positive to have rates rise, and their stocks have been doing just that since Trump's election. George Goncalves, head of rate strategy of Nomura has reflected a positive view by saying that "We're moving away from an Obama administration to a Trump administration, which has clearly a different priority set, and the economy is going to have to retool and recalibrate, and that's going to mean disruption. That doesn't mean a recession. It just means changes, as we adjust to the new world." Surely, there will be interesting developments in the upcoming months therefore, we shall be closely monitoring and providing accurate updates on industries of financial interest.