Fallout From Trump's Victory

Unsurprisingly, the shock Trump victory has caused widespread volatility in the financial markets. The fast money moves were in the expected direction. As early results began to show a shift to Trump and his chances increased, stocks and the dollar dropped, whilst Gold rallied. Dow futures fell 976 points to their lows, the dollar index slumped from over 98 to below 96, Gold rallied nearly $70 and the 10 year Treasury-Note was nearly 2 points up. However, since 5am GMT these moves have been reversed. The first half hour of US trade saw the pace of retracement pick up to a point that a lot of instruments are close to flat on the day. US indices are flat on the day, the dollar index is up on the day, as is the FTSE 100 in the UK. Fixed Income is down a lot and the early indication that a Fed hike in December was less likely has since been eroded. The only asset that has not seen much of a recovery is the Mexican Peso. Trump’s anti Mexican rhetoric has weighed heavily on the currency and their Central Bank has said they will not rush to hike rates to deal with the fall in the Peso.

The market reaction today has drawn parallels to how they responded to Brexit, with stocks rallying after an initial fall and this could explain some of the buying seen. However, other assets reacted differently. Sterling has been on a slide since the Brexit vote, but the dollar has strengthened and T-Notes have fallen. These moves occurred as people began considering the economic implications of a Trump Presidency. Little focus on the campaign was on policy, but from what we do know, it seems likely that there will be tax cuts and less regulation. This is to be expected given that the Republicans now have the President, Congress and the Senate. This is normally a boon for stocks. Trump has criticised Federal Reserve Chairwoman Janet Yellen for keeping rates too low. There is talk that Yellen could resign, although unlikely, but it is clear that Trump will seek to appoint someone more hawkish when Yellen’s term is up in 2018.

The victory for Trump is just another sign of the anti establishment feeling spreading around the Globe.  Nigel Farage campaigned for years and took advantage of growing British dissatisfaction in the European Union, which really picked up after the Global financial crash. As economies faltered, people felt let down by their politicians and as is often the case when things aren’t going well, people look for someone to blame. For many people in many countries, immigrants got the blame. This led to Britain voting for Brexit, with many who voted for it doing so to reduce immigration and prevent free movement of EU citizens. Trump ran on a platform, promising to build a wall to keep out Mexican, many of whom he painted as criminals. He also claimed he will deport all of the estimated 10 million illegal immigrants in America and end automatic US citizenship to any child born on US soil, if their parents aren’t American. It is no wonder that many US citizens who are a minority are uncomfortable with Trump as President Elect. The rest of Europe is also dealing with a rise of right wing anti establishment parties. In Germany the AfD have gained a lot of ground, in France, the National Front are topping the opinion polls. This pattern is seen across Europe, where demagogues are driving growing racial tensions and a move to the right.

Perhaps the people having the worst day of anyone right now are the pollsters. They have once again, completely failed to predict a major election. In 2015, they failed to predict the Conservatives winning a majority in the UK, in fact they were not even sure who was going to be the largest party in an expected hung parliament. Earlier this year the polls were telling us that the UK would be remaining in the EU and were caught off guard once more. And the latest in a string of failures, they failed to predict the Trump presidency. In all these cases there were a few polls who did predict the result right, but they were the small minority. Prior to the FBI re-opening the investigation into Clinton some polls were giving her double digit leads. Even after the announcement many had her ahead and come Election Day she was predicted as having a 4 point lead. Given all these failings, it is hard to imagine anyone trusting polls much in the future. The Italian referendum is next up and we will see if pollsters can redeem themselves. In the mean time, come 2020 you may wish to look to a different indicator for the next President. Since 1980, whichever candidate had more masks of their likeness bought for Halloween has won.

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Reuters: Business News