An extraordinary day in the markets saw an early “flight to safety” largely unwind as participants digested the implications of Donald Trump’s shock victory in the US presidential election.
US and European equity markets shrugged off steep falls for their Asian counterparts and the dollar put in a resilient showing – notably against the euro - while Treasury bonds reversed early gains and gold pared an initial steep advance.
The Mexican peso was a notable casualty but managed to pull well clear of an early record low.
“The markets appear to be sanguine about a Trump presidency, which dramatically increases global economic uncertainty,” said Kathleen Brooks at City Index.
“Perhaps the conciliatory tone in his victory speech has eased concerns about his presidency, or perhaps markets have no idea how to price in his victory, as we have no precedent for someone like Mr Trump.
“Either way, a mere 24 hours ago no one would have predicted such a calm market reaction on the back of this result,” she added.
Support
By midday in New York, the S&P 500 equity index was up 0.9 per cent at a four-week high of 2,157, led by the healthcare and financial sectors, while the pan-European Stoxx 600 index finished 1.5 per cent higher.
The CBOE Vix volatility index, watched as a gauge of stock market stress, was down 16.7 per cent.
A hefty rally for oil prices provided a further layer of support to equity markets, as Brent crude rose 1.8 per cent at $46.85 a barrel.
S&P futures at one point fell 5 per cent, a drop that triggered electronic trading curbs, as the Nikkei 225 in Tokyo tumbled 5.4 per cent and shares in Hong Kong fell 2.2 per cent.
Julian Jessop at Capital Economics highlighted the precedent set by the Brexit referendum in June.
“The shock of the UK’s vote in favour of leaving the EU meant that investors may have been better prepared for a surprise outcome this time, and also quicker to reposition for a swift recovery,” Mr Jessop said.
But he warned: “It is too soon to sound the ‘all clear’ on political risks. The continuity candidate has just lost the US election and there are now many more policy unknowns. The risk of further contagion to Europe has also increased.
Uncertainty
“This uncertainty is likely to ensure continued strong underlying support for ‘safe havens’.”
Such support helped drive gold as high as $1,337 an ounce in early trade - a gain of nearly 5 per cent on the day. But the metal subsequently eased back to $1,287, up $12, or 1 per cent.
The yen, also viewed as a traditional haven currency, gave back a big chunk of its initial rise against the dollar.
The US unit fell to ¥101.20 before climbing back to ¥104.75, down just 0.4 per cent. The dollar reversed an early dip against the Swiss franc to trade 0.5 per cent higher at SFr0.9827, while the euro sank from a high of $1.1299 to trade 0.7 per cent lower at $1.0941.
The dollar index, a measure of the US currency against a basket of peers, was up 0.5 per cent.
The Mexican peso touched a record low of 20.77 pesos per dollar before trimming its decline to trade 7.8 per cent weaker at 19.73.
“We doubt that Mr Trump will follow through fully on his threats to impose large trade tariffs on Mexico or China, or to withdraw from existing deals,” said Mr Jessop at Capital Economics.
Rally
The dollar’s rally came as a strong early advance for US Treasury prices went into reverse as participants moved to factor in the prospect of massive fiscal stimulus.
The yield on the 10-year note, which moves inversely to its price, touched 1.716 per cent, the lowest since early October, before hurtling up to 1.98 per cent, 12 basis points stronger on the day and the highest since March. The 30-year yield was up 16bp at 2.79 per cent.
“The steepening of the US Treasury curve and higher yields suggests the market expects president-elect Trump to make good on his promise to boost spending - defence and infrastructure - and cut taxes,” said Divyang Shah, global strategist at IFR Markets.
John Hardy, head of FX strategy at Saxo Bank, said: “Nominally, Mr Trump does have both houses of Congress after this election, which could mean huge new policy initiatives.
“But given that some within his own party were explicitly against his candidacy, the route to forceful policy is uncertain.”
However, the policy-sensitive two-year US yield fell as low as 0.714 per cent - before pulling back to 0.86 per cent, flat on the day – reflecting speculation that the Federal Reserve could hold off from raising interest rates next month.
– (Copyright The Financial Times Limited 2016)
