Brave New World ? It might need to be .....

Wednesday 9th November 2016

Brave New World ? It might need to be .....

ref : - All media outlets

Today we need to take a look at an amendment to accepted accounting practice in the valuation of ...... well, perhaps not. What else is there but President Trump ? You remember that on Monday we said that the world may well seem like a very different place on Wednesday ? Well, we're there and it does.

Whether you're happy or horrified, this is bound to go down as a momentous day in history ..... and it feels a little strange. It's not unlike the atmosphere after the Brexit vote, only more so. On this occasion, we did highlight the fact that Mr Trump had a very real chance of victory, and we did silently question whether the FBI's 11th hour discontinuation of the latest email investigation had come too late to stop Trump momentum ..... but somehow the outcome still comes as quite a shock. Okay, that's understandable but even if one was underprepared on some intellectual level for this result then at least one would have taken some positions in the market to protect against it, right ? Turns out that isn't proving to be quite as straightforward as some had hoped either ..... but more of that in a second. 

We can leave it to others to discuss personalities, political philosophies and what a Trump victory may or may not say about America and the world beyond. But we do need to consider the politics as the biggest factor in market movements just now, particularly in the context of the fundamental changes being forced upon political orthodoxy across the globe. If Brexit was a hugely significant marker in the march of populist politics, the election of Donald Trump represents the accession of a populist, protectionist power figure to the most important job in the world.

That's a big worry for other politicians across the globe, especially in the European Union where populist parties have already made big gains. Before the end of 2017, there will be crucial referenda or elections in Italy, the Czech Republic, France, Germany, Hungary and the Netherlands. Privately, EU leaders must be thinking that if a character like Donald Trump can win the White House, then anything really can happen..... and not in a good way. If any one of the key upcoming votes sees the electorate reject what up to now has been considered the political mainstream, then what does the future hold for the EU, the Euro and of course Euro-denominated assets ?  That's one to ponder, all right .....

But back to the here and now ..... and a massively confused picture it is, too. Every one of the market reactions that have been widely forecast duly took place as soon as a Trump win began to look likely :

Currencies : US Dollar weak .... Yen, Swissie and even the Euro strong on safe-haven buying .... Emerging Market currencies weak and the Mexican Peso crashing to historic lows (from 18.25 to 20.74 per USD)

Bonds : Yields lower, prices higher  --  again, safe-haven buying

Gold  :  Sharply higher  --  ditto

Stocks : Sharply lower (US equity futures 5% limit down)

Expectations of a Fed rate rise in December : Down from 80% to near 50%

All these were well signposted as the likely ramifications of a Republican win. What wasn't anticipated was an almost immediate reversal of a large part of the moves (and in some case, more). Did we not mention the other day that knee-jerk reactions to the election result should be treated as short-term in nature ? Good if we did ..... but neither we or anyone else imagined "short-term" to mean "a few hours". Now caution is advised here ..... to put it mildly the markets are understandably fractious and confused, and the initial reactions could be resumed at any time. But these reversals are fascinating, and in the fervent hope that any observations are not rendered out of date by the time you read this, we'll just point out two in particular :

Gold : Gold bulls must have been praying for a Trump victory. After closing at $1275 per oz yesterday, a jump to $1336 was presumably exactly the kind of thing they had in mind ..... but a subsequent pull-back brings into question whether Gold really is the preferred "Trump Hedge" of choice, at least until we hear more about what he has in mind now that he'll have to be a lot more specific.

Bonds : Remarkable ..... remembering bond yields move inversely to bond prices, the yield on the 10yr US Treasury  --  having closed yesterday at 1.85%  --  fell to 1.71% on safe-haven buying but then bounced all the way to 1.91%. It's as if the mention of increased infrastructure spending in Mr Trump's victory speech (in amongst the Oscar-style thank you's to friends and family) reminded  markets that, safe-haven or not, bond issuance is likely to increase.

However you feel about things, these are interesting times to say the least. Interesting markets too ..... which of course is just another way of saying "difficult".