Donald Trump and Financial Markets

NEW YORK, NY - NOVEMBER 09: Republican president-elect Donald Trump delivers his acceptance speech. (Photo by Mark Wilson/Getty Images)

NEW YORK, NY – NOVEMBER 09: Republican president-elect Donald Trump delivers his acceptance speech. (Photo by Mark Wilson/Getty Images)

How markets reacted to the surprising victory and what to expect next.

The possibility of Donald Trump presidency was a worrying event for many, but the economists were among the loudest to warn about the unfortunate consequences of Trump’s presidency. More than 370 economists including eight Nobel laureates signed an open letter against the potential president. But while the macroeconomic consequences of the policies put up by president-elect are long-term, the developments of financial markets are much harder to predict. In the article, a day before the election, Eric Zitzewitz, a professor of economics, warned of a 10% fall in global markets in case the Republican nominee wins the White House. Did not happen.

The American stock markets unexpectedly grew after Tuesday’s surprise. Those were Mr. Trump policies, which ensured many investors that some sectors of the economy may actually perform better. Dow Jones Industrial Average hit all-time-high, fuelled by hopes of tax cuts and increase in infrastructure spending. Many analysts do not attribute the stock market gains to the Trump election but rather alluding to the health of the American economy, which has been growing for more than 7 years.

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The wider S&P 500 index also gained 0.2% with various sectors reacting differently to the news. The banks surged 3.7% on expectations of lower regulation and repeal of Dodd-Frank Act. The post-crisis restrictions and low-interest rates environment have been responsible for the sell-off of financial stocks. With the December Fed meeting coming closer and high possibility of rates hike, the banks may expect 2017 to be much better.

The similar sentiment of lower regulation boosted Healthcare stocks not only in the US but also in Europe, where they were the biggest winners. Pfizer is up more than 8% since the election. European giants Novartis and Sanofi are both up by more than 4% comparing to the Euro Stoxx 50, which plummeted on the news of Trump victory but then rallied and closed at the same levels.

The big losers of the night were Technology and Utilities shares. Tech companies are among the most relying on foreign exports and imports. If Mr. Trump’s to kill the US trade deals, tech giants will suffer first. With more than 50% of sales abroad, many technology companies may lose a significant part of their revenue. In addition, Donald Trump has strained relations with some IT leaders. Apple was criticized during the campaign for production in China. Amazon’s CEO and the owner of Washington Post was also attacked by Trump, who threatened investigation of Amazon.

Utilities that are famous for low volatility and stable dividends flow suffered from rising bond yields. The stocks of water, gas and energy suppliers are considered substitutes for bonds, so the bond market fluctuations affect their stock price.

The bond market reacted differently to equities with 10-y US Treasury bills prices down and yields up. Trump policies are likely to boost inflation, so the compensation for holding long-term assets must now be higher. Moreover, all the spending must be funded by the issuance of more bonds, so the supply will certainly rise.eur-usd

The currency market experienced a fast dip, with dollar plunging against the euro to 1.1250 and immediately regaining ground after Mr. Trump’s surprisingly calm acceptance speech. Fiscal spending, tax cuts and bringing the offshore cash back to America will essentially increase the demand for dollar and it will rally in the long run – the most accurate Bloomberg analysts claimed. Higher interest rates will also make dollar an attractive investment bringing capital from developing countries, whose currencies are to suffer most in the next 4 years. The aggressive protectionism will create hardship for America’s largest trade partners as Mexico, Canada and China. The Mexican peso is already at record lows losing more than 12% after the upsetting victory. The Chinese Yuan also plummeted to 6-year low.

Some commodities were also the big winners of the November 8 night. The gold is a traditional safe haven in case of recession or geopolitical tensions failed to keep up with the bad expectations and collapsed; it rallied right after the announcement and may rise even more in case the economy will not be so great under Trump, but for now it is surprisingly weak. The development of the oil price is difficult to predict. On one hand, Mr. Trump supported increasing domestic production and more investment in oil and gas infrastructure. On the other hand, it is unclear if the petroleum exporting countries will cut the production and what the US relations with them will look like. Donald Trump who has been accusing Muslims of terror during the campaign may not be very nice to the Middle East countries.

Taking into account how unpredictable Donald Trump is, his stance on the important issues may change overnight. The American political system is, though, not particularly vulnerable to the mood of the president. The economy has been doing great for the last years – GDP growth is strong, the country is close to the full employment and corporate profits are solid. Mr. Trump has to do something  in order to overturn the positive trend. That is why, as long as Congress thinks clearly, the market will not collapse, but some changes are definitely here to happen.