Forget the accepted pre-election wisdom. Now he's in, look at it this way .....

Thursday 10th November 2016

  

Forget the accepted pre-election wisdom. Now he's in, look at it this way .....

ref:- "Stocks Surge with Metals as Trump Win Revitalizes Growth Outlook", Bloomberg Markets

ref:- "Europe Braces for Shock Waves from a Trump Presidency", Simon Nixon in Wall Street Journal, see also The Times

You know how some people were saying that Donald Trump is a divisive, confrontational polemicist intent on breaking up the status quo? Well, it turns out that actually he's just a big old Teddy Bear ..... not only warm and fuzzy but also possessing the wisdom to surround himself with people savvy enough to steer him through the areas that don't match either his character or his field of expertise. At least, that's what you might imagine judging by the warm reception to his words of acceptance and by the way many markets have reacted.

If you're not entirely convinced by the image of Mr Trump bringing everyone together then you wouldn't be alone, and it'll be a while before we get a true picture of where he wants to go. We doubt that all the advisors in the world will be able to keep a lid on his natural and sometimes ill-considered aggression forever, but they must be relieved that Mr Trump stuck to the script (as opposed to his instinct) on this occasion in thanking Mrs Clinton for her service to her country. That's "Crooked Hillary" remember, and even if his words dripped with insincerity Mr Trump was able to maintain political convention. You've got to ask yourself whether he'll be so circumspect when it comes to deciding whether or not to make good on others of his wilder pre-election statements and promises  --  or were they just acceptable campaign posturing?

Enough of that for now .... how about these crazy market moves (compared to expectations, that is)? Actually, they're not crazy at all. You could build a cogent argument to justify most moves in theory, and just as there were legitimate reasons to expect "stocks down, bonds up, gold up, dollar down"  --  which of course did happen but very briefly and mostly in Asia and Europe  --  so there are good reasons to explain the reversals.

There are certain things we can assume to be true: Mr Trump, famously short on tangible policy detail during the campaign, has at least reasserted his commitment to boost infrastructure spending way beyond the $275 billion plan that Mrs Clinton was promoting. He aims to increase expenditure on defence. His determination to reduce taxes (particularly for the wealthy and for corporations) is not in doubt. These have market repercussions that have already superseded the  knee-jerk reactions witnessed on Wednesday morning.

Stocks are on the up, encouraged by the expansionary fiscal stimulus, especially in construction etc. Mining and Defence stocks are higher. Pharmaceutical and Banking stocks are stronger as Mrs Clinton's proposals for heavier regulation come to nothing.

Bond yields are sharply higher (and prices lower) as investors weigh up the costs of fiscal spending at a time of tax-cutting. The shortfall will have to be paid for by issuing more bonds. Expansionary policies are also inflationary, and expectations are for a higher pace of rate rises next year. Never mind the momentary flight to quality witnessed yesterday that took 10yr Treasury yields to 1.71% --  they're currently trading at 2.06%, a huge swing.

Dollar strong on the back of the changing perceptions of the pace of rate hikes, and the fact that the odds on a hike next month (down to 50% yesterday) are back to 80% after the expected post-election market turmoil failed to materialise. The sake-haven buying of Jap Yen and Swissie now seems like a blip. USD / JPY now 106.60 after 101.30 yesterday (!!), USD / CHF 98.80 after 95.55.

The moves in bond markets are particularly noteworthy in themselves, but they also present the European authorities with a bit of a problem. We did discuss (yesterday, was it?) how the Trump win was unlikely to be welcomed by EU leaders, except in their warm congratulatory messages (now who's being insincere?). The green light it would seem to offer other populist political parties could be something of a nightmare for them in advance of so many elections in EU states. But the way US markets have reacted to a Trump win also puts the ECB in a difficult position.

The ECB must decide next month on how exactly it will increase the supply of bonds eligible for purchase through its QE programme. It has three options, none of which is ideal and would face opposition form the more hawkish nations:

It could allow itself to buy bonds at a level that guarantees that it will take a loss

It could increase the proportion it is permitted to own of any issue

It could abandon the capital key  --  which dictates that purchases are undertaken in strict proportion to each country's holding in the ECB ( based on the size of their respective GDPs)

Eurozone yields being dragged higher by US Treasuries (which is already happening) might help out with the amount of bonds with sufficient yield to be eligible, but in every other way it is the last thing that the ECB wants. The whole point about QE is to suppress yields to boost growth and inflation. Whatever certain states like Germany might prefer, the ECB is determined to pursue it's ultra-easy monetary policy and to see tangible signs of growth before constituent nations face tricky elections. Their ability to do so would be undermined by rising yields, and that kind of scenario would make them accidental casualties of the Trump victory. It's doubtful that was on the list when they assessed the potential downside risks of the US election.