Trump victory and initial responses: Markets anticipate delay in rate hikes

Markets called it wrong for the second time this year, being caught by surprise by a Republican victory in the US presidential election. While the initial stock market response in Europe remained moderate, with the CAC40 and DAX30 falling by about 2% respectively and the FTSE 100 initially dropping to -0.5%, asset managers and financials suffered some of the sharpest losses.

InvestmentEurope is publishing a rolling series of responses to the overnight victory by Donald Trump in the US presidential election.

Equities:

Stefan Kreuzkamp, CIO at Deutsche Asset Management acknowledges the surprise impact, but cautions against panic responses: “..we do not think that investors should lose their nerve. Let us not forget that the key constant in Trump’s election campaign was to continually surprise the public. It is entirely possible that after his election, he could in fact surprise markets on the positive side. Our hopes are based on Trump’s pragmatism, his ability to adapt and his generally limited political allegiance. There is a chance that he could allow the political veterans in Congress to pass a fairly classical Republican campaign program” he stresses.

Mike van Dulken, head of Research at Accendo Markets adds: “Equity markets are negative, but nowhere near as much as you might expect, as investors digest news of a Trump Presidency. A FTSE100 close to breakeven, having rallied 300pts from its overnight lows, and a DAX and DOW nursing what can only be described as minor losses in comparison to all those apocalyptic forecasts, looks a decent outcome. If anything, what’s happened bears eerily similar hallmarks to Brexit; complacency, surprise and panic followed by swift recovery. If anything it’s happened more quickly this time. Could Trump prove less controversial now all those populist votes have been won?” he questions.

John Bailer, senior portfolio manager, The Boston Company Asset Management  comments “With Trump’s election, we expect markets to pull back due to short-term uncertainty. However, it’s not a reflection of the fundamentally sound US economy. The US has full employment and rising household formations, which has positive knock-on effect for other sectors. When coupled with low inflation, we believe the US economy can grow at around 2% without overheating” he argues.

However, German insurance giant Allianz Global Investors expresses a more bearish outlook: “Given the unknowns and unpredictability surrounding Trump, we expect to enter a “risk-off” environment with higher volatility and greater demand for “safe havens” like gold and US Treasuries. Hospital stocks could be hit hard, given Trump’s repeated calls to put an end to “Obamacare”. After the initial shock settles, Wall Street will likely look forward to Trump’s proposed tax reforms, and to the prospect of some Congressional Republicans counterbalancing some of Trump’s more extreme views. Further out, markets will probably start to adjust for deglobalization risks, which could weigh on equities, and inflation risks, which could affect bonds. However, much depends on how effectively Trump can sell his ideas to a Congress that, while Republican in name, may not be entirely on his side” the group stated.

Fixed Income

For fixed income investors, the impact of Trump’s victory has so far been paradoxical, as Jim Leaviss, head of Retail Fixed Interest at M&G Investments argues: “As expectations of a Trump win grew last night, the US Treasury market rallied aggressively.  You might think this perverse given that Trump has openly discussed “haircutting” Treasury investors, but this is a flight to quality response.  The Fed was seen as nailed on for a 25 bps hike in December, but the uncertainty impact of a Trump win makes this much less likely (and will Janet Yellen still be head of the Fed under a Trump regime?).  The implied probability of a rate increase has fallen from over 80% to 50%.  Rate expectations have fallen for 2017 too.”

David Zahn, head of European fixed income at Franklin Templeton Fixed Income Group adds:Looking at the longer term implications of the Republication victory for Europe, there are a few immediate questions. Notably, regarding trade and international relations. Trump has taken the stance that overseas US partners should increase military spend. This could have a knock on impact for Brexit negotiations, as we might see the UK and Europe wanting to maintain more a group mentality, given the UK’s relatively large military spend in comparison to Europe.

Emerging Markets

The fact that a delay of the Federal Reserve rate hike has now become more likely could also be beneficial for some emerging markets, as Jason Pidcock, manager of the Jupiter Asia Pacific Income SICAV fund points out: “Paradoxically, such a scenario might create an ideal environment in which the Jupiter Asia Pacific Income Fund could flourish; bond prices would be pushed up, yields would fall and investors seeking income would be practically forced to continue to search for yield in equities. Then again, what good is outperformance when you’re only able to do so on a relative basis against a turbulent market.”

Nevertheless, NN IP cautions against being overly optimistic and highlights the dangers for countries with a strong regional exposure to the US: “Emerging markets and related assets are particularly vulnerable, as investors fear protectionist measures that would seriously impact US imports from emerging economies. Most exposed are the economies that export most to the US. The clear standout here is Mexico, which sends 82% of its exports to its northern neighbour. The country’s export sector is a primary source of employment and export growth has to keep up with import growth to prevent an excessive widening of the external imbalance. China is also sensitive to possible changes in US trade policies. About 18% of Chinese exports go to the US. With China’s domestic demand outlook not particularly bright, the country needs to post decent export growth to prevent a sharp economic growth slowdown” NN IP warned.

Volumes

Rob Boardman, European CEO of equities broker ITG, said that: “Trump’s shock victory has led to a very busy open, with 3x the normal volume in the first 30 minutes of trading. Fast money flows are driving the volume, but there have been relatively few block trades.”

“Many stocks, especially Swiss, have extended auction periods. Healthcare stocks have opened strongly, reversing some of the losses in recent weeks.”

Currency

Fabrizio Quirighetti, chief investment officer at SYZ Asset Management, said: This unprecedented presidential race has finally come to an end and, once again, the anti-establishment vote has been underestimated by polls, journalists and analysts as the winner is Donald Trump. The first thing that comes to our mind is ‘hope for the best, but prepare for the worst’, as the campaign has provided many evidences Trump could be a terrible president.”

“His victory, to an extent, is also the symbol of current political failure to address key socio-economic challenges. It clearly has raised uncertainties – at least in the short term – not only about the current economic backdrop, but also in terms of geopolitical developments going forward. As a result, elevated volatility across global markets may prevail for the next few days and probably bring interesting opportunities if assets valuations reach exaggerated depressed levels at some point.”

“The immediate reaction now is to sell risk, especially EM assets, and buy safe-haven assets such as US treasuries and gold. Medium-term, his administration could be characterised by a powerful reflation trade, with a higher bond yields.”

“We estimate a downside risk of 5-7% for global equities over the next two or three days. US assets should now trade significantly lower but, as usual, thanks to their defensive nature, they may outperform in relative terms.”

“It is clearly devastating news for the Mexican peso and is a bad hit to the Canadian dollar. MXN may now trade much above 20 against USD and remains quite volatile over the next few days. RUB and some Asian currencies, such INR, should prove somewhat resilient in the EM space.”

Property

Ohio-born Jean Liggett, CEO of UK’s Properties of the World, said: “The US economy remains the force that sets the pace for the rest of the world. Even with the rise of China and the growth of other emerging markets, America is still the strongest economy in the world.”

“Donald Trump’s US presidential election victory raises concerns over the impact of this outcome for global economies, including that of the UK. Today’s Trump victory is likely to cause market trepidation around the world. Many companies and investors may look to move their investments and companies, at least in part, out of the US to safer havens.”

“Trump’s election could generate a significant movement in the US dollar and potentially jeopardise US diplomatic relations across the world.”

“However, Trump’s victory may well prove beneficial for the UK property market, as investors seek to migrate their portfolios from the US to a more secure and predictable market – the UK. This may even mean that the sterling could rise in value. Under Trump’s stewardship, ‘predictable’ may need to be removed from the US English dictionary for the next four years. Only time will tell how the US property market – and others around the world – respond to his election victory.”

ABOUT THE AUTHOR
Mona Dohle
Mona Dohle speaks German and Dutch, she is DACH & Benelux Correspondent for InvestmentEurope. Prior to that, she worked as a journalist in Egypt and Palestine. She started her career as a journalist working for a local German newspaper. Mona graduated with an MSc in Development Studies from SOAS and has completed the CISI Certificate in International Wealth and Investment Management.

Read more from Mona Dohle

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