Trump being elected the 45th U.S. president was not the only shock yesterday; the markets’ reaction was even more surprising. The immediate response looked like Brexit version 2.0, but as we headed into the European session stocks took a U-turn, recovering from heavy losses into sharp gains. Treasury bonds, currencies and commodities all reacted in the same way.
U.S. equity benchmarks approached their record highs after falling by more than 5% in the futures market, meanwhile yields on 10-year treasury bonds rose 22 basis points to trade above 2% from an initial 14 basis point dip. Gold was no exception, the yellow metal lost $60 an ounce from its high, and Asian equities are skyrocketing from yesterday’s initial selloff. I have probably never seen such a day like this in my 14-year career in the financial markets!
My only explanation to the markets’ super-fast reversal is that investors started looking at the fiscal side. More than eight years into the crisis, central banks were the major driver of financial markets and when their monetary policies started looking ineffective, stock markets remained stuck in narrow ranges. Now with Trump’s promises of big U.S. fiscal spending on the horizon, including massive cut in taxes and less regulation, investors believe that U.S. profit growth will rise sharply, inflation will return, and bonds’ yield curves will steepen.
The financial sector, healthcare, and industrials were the main beneficiaries yesterday, while high yielding stocks, like utilities and real estate, had a tough day.
The U.S. dollar also rose from an earlier steep selloff on the prospect that the Fed will go ahead with its plans and raise rates in December. I believe that the trajectory of rate hikes will be even faster if Trump decides to deliver on his promises, which will spur inflation expectations.
However, there are many doubts and questions which remained unanswered. Will Trump deliver on his trade agreement promises, foreign policies, and immigration plans? Or was it only adverts for his campaign, and will the businessman be a different person after he becomes the president? One thing for certain is we’re going to see more volatility ahead, so better keep your seat belts on.