Equities
Stocks in Europe have taken their lead from the astonishing turnaround in US markets which saw the Dow Jones hit a new record high. It’s not just stocks on the move. 10 year treasury yields are near the highest this year and gilt yields have recovered to pre-Brexit levels.
That markets have recovered from the initial ‘surprise-factor’ of a Trump election win should not be surprising. There are bigger factors at play in markets than who will become the next US president, most importantly central bank and government stimulus. It’s the size and speed of the recovery that’s the real shocker.
In just a matter of hours, markets have switched from the election victory as a glass half empty to a glass half full. The perceived negatives of a Trump victory of protectionist trade policy and his anti-Federal Reserve rants have been put aside in hopes he will run a pro-business administration supported by tax cuts, fiscal spending and deregulation.
The themes of inflationary fiscal spending and an undivided government willing to push through tax and regulatory reforms have really taken hold.
The FTSE 100 gave up its early gains thanks to a late drop in the energy sector. Basic materials and industrial sectors led gainers on hopes of a US-led infrastructure spending boom while perceived havens like utilities and tobacco lost out. National Grid (LON:NG) led the decline in utilities, falling 8%, after it reported on even par with last year.
The rally in British healthcare stocks was curtailed by poorly-received results from AstraZeneca. The
UK pharmaceutical firm continues to get stung by generic competition for its cholesterol drug Crestor, though cost-cutting and a one-off tax gain minimised the damage from falling sales. More widely, pharmaceutical and biotechnology stocks have surged in relief at avoiding potentially profit-harming new regulations under a Hillary Clinton presidency.
Shares of Barclays (LON:BARC) and RBS (LON:RBS) both gained close to 4% on Thursday as bond yields continue to rise. Despite all the “anti-Wall Street” rhetoric, cutting red tape like the Dodd-Frank act would be a positive for the banking industry.
US stocks were mixed in early trading with a fresh record high for the Dow Jones Industrial Average whilst the S&P 500 fell into the red.
FX
Markets are hearing some of the first reactions from US central bankers to the election result. The San Francisco Fed’s John Williams has clearly taken heart from the resolute reaction in financial markets, saying a gradual rise in rates still makes sense.
The outlook for interest rates has been muddied by the uncertainty of a Donald Trump victory, but markets continue to price in a December rate hike from the Federal Reserve.
It will be easier for the Fed to meet its inflation and employment targets if there is higher fiscal and infrastructure spending by the government. Donald Trump’s main policy ideas like increasing tariffs and borrowing for infrastructure spending are inflationary by nature.
The large move in the US bond market has been matched with big swings in the Japanese yen. After nearing 101 on Wednesday morning, USD/JPY approached 107 on Thursday.
The dollar strength saw its biggest manifestation in emerging market FX. The South African rand and Turkish lira were seeing bigger declines than the Mexican peso.
Commodities
After a brief respite, gold prices continued to decline as the US dollar headed higher. Record high stocks and the central bank tightening interest rates are not good economic variables for gold.
For gold to gain traction again, equities need to drop, or inflation has to go up without expectations for a Fed hike, a situation only likely if there were to be stagflation. If Donald Trump’s policies cause higher prices but not higher growth, the Fed might opt to leave rates low, creating the need for an inflation-hedge like gold.
A warning from the IEA that crude oil prices would fall again unless OPEC enacted a “significant” output weighed on oil prices.
The Donald Trump effect on energy could be multi-faceted. Trump has said on the campaign trail that he is against the Iran nuclear deal. If sanctions were imposed back on Iran it would curtail output, and perhaps make further OPEC cuts more feasible. He is also an advocate of American energy independence and could green light some of the drilling projects that were rejected by Obama, adding to US supply.
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