Originally published by Rivkin Securities
In case you haven’t heard, Donald Trump has been elected the 45th president of the United States of America in what seemed to be a shock defeat of Hilary Clinton who was leading in the polls throughout the race. While markets initially sold-off throughout Asian trading and early European trading as uncertainty weighed on investors’ minds, European losses were erased and US equity markets were also higher despite S&P500 futures trading at one point 5% lower.
In his victory speech Trump said that Americans must now come together and that he would be a president for all Americans. Overall the speech was certainly in contrast with some of the earlier parts of his campaign trail and that helped alleviate some of the uncertainty in the markets.
The initial reaction as many predicted would happen in this scenario was a knee-jerk reaction as investors sold risk and piled into safe haven assets. However once investors had processed this information we saw a big risk reversal with safe havens sold and risk assets bought.
US equity markets were higher this morning, with both the S&P 500 & Nasdaq 100 up +1.11% & +0.42%, shown on the first chart below, with gains led by healthcare (+3.24%), financials (+2.98%) and basic materials (+2.69%) while utilities and consumer non-cyclicals lagged behind -3.60% & -0.86% respectively. U.S. treasuries yields swung during the session, the two-year yield initial feel -15 basis points before evening gaining +3 basis points to be around +0.8941% as did the ten-year yield, up +2 basis points at +2.0699% after initial declining -14.6 basis points.
Looking at safe haven currencies, the yen initially gained +3.7 before finishing -0.50% weaker, as did the Euro initially up +2.50% before closing -1% weaker. The Swiss franc which is also a safe haven closed -0.64%, the British Pound finished +0.36% and overall the U.S. dollar index was +0.80% stronger. No surprises with the Mexican peso which was -8.50% weaker this morning seen on the second chart below, as the country is most likely to be impacted negatively by Trump’s protectionist policies. The third chart below highlights spot Gold initially surged +4.87% before reversing to trade up just +0.20% this morning while spot silver was also up +0.65%.
In Europe equity markets reversed initial declines to finish stronger, the EURO STOXX 600 closed +1.46% higher, as did the DAX +1.56%, FTSE 100 +1.00%, FTSE 250 +0.82%, Euro Stoxx 50 +1.09% and CAC 40 +1.49%. The yield on two-year German government debt declined -2 basis points to -0.653% while the ten-year yield was unchanged around +0.179%. In the U.K. bond yields rose, two-year yields up +0.5 basis points to +0.217% and then-year yields rising +2 basis points to +1.259%.
Commodities were broadly higher despite the US Dollar benefiting for increased sentiment around fiscal stimulus. Both Crude Oil & Brent Oil gained +0.49% & +0.65% respectively despite a slightly higher than forecast increase in US crude oil inventories. Stockpiles rose 2.432 million barrels vs 2.0 million expected however this was offset by a larger decline in gasoline inventories which fell -2.841 million barrels against an anticipated -1.50 million barrel decline. Elsewhere Copper jumped +3.11% as did Natural Gas up +2.32% and the Thomson Reuters CRB index was +0.24% higher.
Looking ahead I’m not overly confident we will see Trump actually implement some of his more extreme policies such as 45% tariffs on Chinese products. Like all presidents before him he has made promises on the campaign trail but once he gets into the white house in January implementing them may be a different story. The other outcome of the election is a fully controlled senate and house by the Republicans who will keep Trump in check and generally be business friendly. This along with a republican president we can look forward to no more gridlock in the government who can now actually get on with its job of governing.
With the uncertainty around the election out of the way we can also get back to focusing on how the economy, and in particular companies are performing. Third quarter earnings season is almost over with 89% of companies having now reported, of those 71% have topped earnings estimate and 54% having surpassed revenue forecasts. We are now on track to see some very modestly year-on-year earnings growth ending five periods of earnings recessions. Ultimately that will be a very positive sign for the economy and help to justify some of the higher P/E ratios we see in the S&P500.
Trump has promised to spend big on defence and infrastructure, inflationary policies aimed at growth. This has been a key focus by central bankers lately, highlighting that not enough is being done by governments to stimulate growth, instead relying on monetary policy which only has limited tools at its disposal. Looking ahead to the FOMC decision in December, a lot can change between now and then however it is unlikely that we will see any impact on the data for the underlying economy in that time. Instead what we will be looking for is for financial markets to continue to function effectively and watch closely for any tightening in those financial conditions.
While we cannot rule out the Fed possibly delaying a December rate hike, realistically I think the FOMC is more likely to raise rates in December than not. Looking at the fundamentals the economy is still on track for a strong 3rd & 4th quarter, inflation is almost at the Fed’s 2% target, unemployment is sub 5% and wage pressures are building. The Fed has also stated it is concerned with the build-up of financial risk by leaving rates too low for too long and also their credibility with the market and the damage postponing a rate increase would be to that credibility.
The probability of a rate hike calculated by the CME Groups FedWatch tool suggests a 76.3% probability of a rate hike in December. The market is very prepared for this and it has been significantly factored in, what is important looking forward is the projected path of future hikes. The FOMC currently predicts they will raise rates two times in 2017, at the December meeting they will provide updated forecasts and the important outcome will be that they continue to project a very slow and gradual raising of interest rates.
US data overnight was certainly not in focus however the final reading for wholesale inventories (MoM Sep) fell 0.1% vs expectations to remain unchanged at +0.2%. Inventories actual have an inverse reading with the economy, meaning declines in the data suggesting rising demand which then flows through to growth as more inventory is required to replace this.
Also perhaps overlooked with the election excitement yesterday was Chinese CPI & PPI data. Year-on-year for October headline CPI rose +2.1% as forecast and up from +1.9% previously. While the producer price index which is a lead indicator for future inflation increased +1.2% which was higher than the forecast +0.8% and previous reading of +0.1%. The PPI reading has turned positive for the last two months halting negative readings since 2012 as early stimulus from policy makers in 2016 flows through to the economy and as reflect rising commodity prices. This follows on from slightly disappointing Chinese trade balance data early in the week which was lower than expected at US$49.06 billion vs US$51.70 billion, although it was up from the previous US$41.99 billion. The story out of China continues to be one of stabilisation as we continue to see encouraging signs and that will ultimately be positive for global sentiment.
Locally the S&P/ASX 200 closed -1.93% weaker at 5,156.56 although it closed well off the session lows of 5.052.10. Meanwhile we can expect a decisively stronger start to trading this morning with ASX SPI200 futures up +158 points in overnight trading.
Data releases:
· Australian Consumer Inflation Expectations (MoM Nov) 11:00am AEDT
· Australian Home Loans & Investment Lending (MoM Sep) 11:30am AEDT
· U.S. Continuing & Initial Jobless Claims (Oct 29 & Nov 5) 12:30am AEDT
· Fed’s Bullard Speaks on Economic Outlook 1:15am AEDT
Chart 1 – S&P500 (Blue) & Nasdaq100 (Purple) Indices
Chart 2 – USD/MXN
Chart 3 – XAU/USD (Spot Gold)
