Today has been one of the wildest reversals of sentiment I have seen in my nearly 25 years in the markets. A massive risk off shift that sent capital out of stocks and into defensive havens has been completely reversed and many markets have broken out in the other direction. Traders have moved decisively back into risk markets crushing gold and JPY while sending stocks soaring. The stock market decline and recovery that occurred after the Brexit vote last summer over the course of a week or two took place over less than 24 hours this time.
The violent moves indicate the Trump win was quite a surprise for the markets but at the same time, traders appear to have taken solace from the fact that it was a decisive result. Not only did the Republicans win back the White House, they held control of both houses of Congress, giving them a mandate and the ability to break gridlock and implement change.
Knowing the election won’t be contested appears to be driving a relief rally with gains picking up again following Hillary Clinton’s concession speech and Donald Trump taking a more Presidential tone in his acceptance speech.
Traders appear to have quickly moved past the volatility of the election and are starting to speculate who could be the winners and losers based on the election results. The US Dollar rallied with traders expecting a more hawkish Fed going forward with Democrat doves Janet Yellen and Lael Brainard losing stature. The street is still pricing in an 80% chance of a December rate hike with post-election volatility quickly fading and Donald Trump likely to pressure the Fed to get on with normalizing interest rates having previously accused the central bank of keeping rates artificially low to help the Democrats.
Some stocks related to potential Trump initiatives rallied on the day including Caterpillar on speculation plans to build a wall (or at least in some places to beef up border security) could increase demand for heavy equipment. Defensive stocks also picked up in the hope of more spending. On the flip side, the marginalization of anti-Wall Street crusader Democrat Elizabeth Warren sparked a rally in US banks led by JP Morgan and Goldman Sachs.
There also were splits within and between sectors on the potential for a change in policy direction. For example markets related to fossil fuel production (coal and oil) benefitted from a potentially friendlier administration while alternative energy stocks, particularly in the solar sector were hammered by the pending loss of support from President Obama.
The health care sector also split on the change in power. Pharmaceutical and biotech stocks led by Merck and Pfizer rallied as the overhang from Hillary Clinton’s plans to reduce drug costs faded. On the other hand hospitals and health insurers were hammered on the increased potential Obamacare could be repealed.
The Trump win also impacted international markets. His antagonism toward Mexico led to the Peso being hammered. The Canadian Dollar also fell initially on concerns that Canada could be caught in the crossfire if the US tries to renegotiate NAFTA, but recovered as the Day progressed. Canadian auto parts giant Magna International fell on concerns trade disputes could impact the auto sector. On the other hand, gold producers started out strong and managed to finish in the green suggesting traders expect ongoing uncertainty and volatility to be good for gold in the longer term.
JPY has had an extremely big day soaring then crashing with USDJPY
ending with an upside breakout but resource dollars like AUD and NZD have also been very active. NZD has spiked upward after the RBNZ cut interest rates as expected. Although Governor Wheeler blamed the cut on a combination of the rising Kiwi Dollar, political uncertainty and low interest rates elsewhere, he also expressed concern about house prices and suggested with the cut, New Zealand inflation is tracking toward the middle of its target range. These last two items got traders speculating he could be done cutting rates for now.
Asia Pacific markets closed yesterday near the point of maximum pessimism and because of this, have the potential to stage significant catch up rallies today. We may see continued volatility across markets as traders try to assess what the second big populist upset this year confirming a seismic shift in political trends may mean for economic and business opportunities going forward.
There have been no major announcements after the US close today.
Significant announcements released overnight include:
NZ RBNZ interest rate 0.25% cut to 1.75% widely expected
US DOE Crude oil inventories 2.4 mmbbls vs street 2.0 mmbbls
US DOE Gasoline inventories (2.8 mmbbls) vs street (1.75 mmbbls)
US 2016 Election Results: (from CNN)
President Donald Trump 289, Hillary Clinton 218 with 30 votes still not called
Senate Republicans 51, Democrats 47 with 2 seats still not called
House of Reps Republicans 235, Democrats 191
Upcoming significant economic announcements include:
(Note: 11:30 am in Sydney/Melbourne is currently 1:30 pm in Auckland, 4:30 pm in Vancouver, 7:30 pm in Toronto/Montréal, 12:30 am in London and 8:30 am in Singapore)
10:50 am AEDT Japan machine orders street 4.1%
9:00 pm EST FOMC Williams speaking
7:00 am GMT Norway consumer prices street 2.9%
7:00 am GMT Norway producer prices previous (6.1%)
7:45 am GMT France industrial production street 0.4%
9:00 am GMT Italy industrial production street 2.2%
10:00 am GMT Greece unemployment rate previous 23.2%
10:00 am GMT Greece consumer prices previous (1.0%)
8:30 am EST Canada new house prices street 2.8%
8:30 am EST US jobless claims street 260K
10:30 am EST US natural gas street 52 BCF
9:15 am EST FOMC Bullard speaking
12:45 pm EST FOMC Lacker speaking