Global markets were shocked yesterday morning as controversial Republican candidate Donald Trump was announced as the 45th President of the USA. The election race ended on Wednesday morning (UK time), with the state of Wisconsin pushing the Property Tycoon over the 270 vote threshold.
Markets had previously been pricing in a Clinton victory after the Democratic candidate was acquitted by the FBI following a second investigation into the email arrangements as secretary of state on Sunday 6th November, just two days before Election Day. In an unexpected turn of events, the Republicans won a ‘clean sweep’ victory, taking control of the Senate, the House of Representatives and also the Supreme Court.
Markets initially reacted strongly to the news of Trump’s victory with an aggressive sentiment shift. In equity markets, all sectors were in the red apart from healthcare, with banking stocks taking the hardest hit with a -2.98% share price movement. In currency markets, the US dollar weakened, and the market experienced a flight to quality, with a strengthening of safe haven currencies such as the Japanese Yen and the Swiss Franc. The Mexican Peso was the biggest loser in currency markets, taking a reduction of 14% at its lowest point throughout the night. In Fixed Income markets, yields fell on safe haven bonds and the US bond yield curve steepened. In Commodity markets, safe haven assets including gold and copper strengthened where oil and agricultural commodities declined.
Since the initial reaction markets have calmed, and it is widely regarded that the markets have reacted optimistically, becoming more positive throughout the day. The initial turbulence in equity markets has calmed, with European markets proving to be relatively robust, opening down but not aggressively reacting in core markets. In comparison, the shock to markets is not as large as that experienced after the EU Referendum and Brexit decision back in June.
Markets opened with increased volatility due to fears about the future of economic and foreign policy under the Trump presidency. Throughout the election campaign, Trump was largely vague about how he would achieve his economic policies, and increasingly found himself in the press due to sweeping statements about proposed foreign policy- including branding China as ‘currency manipulators’ again in September.
Despite the increased uncertainty within equity markets surrounding the new presidency, let us not forget that equity markets typically perform well under Republican control of the White House and Congress. Trump has highlighted that he wants to lower taxes by reducing corporation tax, and potentially income tax. He also plans to reduce government regulation and increase infrastructure spending, indicating an expansionary fiscal policy in an environment where monetary policy is also supportive. This could result in increased upwards inflationary pressures which would be an factor to watch in the long term. Trump is already being described as having a fiscal stance similar to Reagan’s in the 1980’s. Dependant on whether Trump’s election policies are actually implemented, this could be a particularly stimulative period for the US economy.
In terms of the impact of the Trump policy on the rest of the world, where the short term reaction may be limited, in the long term this could result in increased isolationism, with more protectionist policies, increased immigration laws and potential trade tariffs/ embargos- reducing incentives for global trade. Trump has already expressed displeasure with current and proposed trade agreements, along with a desire to end the North American Free Trade Agreement (NAFTA), which is currently a key benefit to Latin American countries. Additionally, increased protectionism and trade tariffs are likely to have a large negative impact on Europe as a key trading bloc. This is increasing volatility in markets in the short term before Trump clarifies his platform on trade.
In terms of monetary policy following on from the election, markets were previously pricing in a high (roughly 80%) chance of a Fed rate rise in December, however are now pricing in a much lower (around 51%) chance following on from the shock to markets of the Republican win. Despite this shock, markets have not ruled out a rate rise before the end of the year, and if markets stabilise between now and December, it could still be on the cards. In the past, Trump has been sharply critical of the Federal Reserve, particularly of Fed Chair Janet Yellen. Yellen’s term runs until 2018 and Trump is unlikely to remove her before the end of her term.
Overall, reactions to Trump’s Presidential victory have been mixed, with increased uncertainty in markets. The Global market outlook will depend heavily on early actions of the Trump administration after his inauguration on 20th January 2017. As it stands Trump will inherit an economy which is in a strong position, with solid fundamentals- therefore overly negative sentiment is expected to be short-term. We believe that when levels of Global uncertainty are high, diversification in portfolios in terms of asset class and geographical location is paramount. Our portfolios are not currently overweight towards the US, and we will not be looking to reduce our exposure over the long term. US company earnings data remains strong, and economic data remains positive. We are confident in the fundamentals of our US investments, and we continue to view our portfolios as well positioned given the Global macro-economic environment. For now, we encourage our investors to be driven by long-term investment goals rather than short-term sentiment whipped up by the election.
Opinions constitute our judgement as of this date and are subject to change without warning. Forecasts are not a reliable indicator of future performance.