Bullet Report: Why Markets Reversed after the TRUMP-SLUMP

November 11, 2016


Today’s calendar is thin, so focus will remain on the economic implications of the Presidential Elections in the US. Yesterday’s result ignited a turmoil that surpassed the one caused by Brexit on the 23rd of June. In fact, trading volumes nearly doubled Brexit. Fears that Donald Trump’s risky foreign and immigration policies would hinder US growth, sent stock markets and the USD into a plunge. In a quick fashion though, the picture was reversed following his first speech after the election results, resulting into Stock markets recovering all their losses and closing near record highs. The USD, which after the election plunged, quickly reversed its losses and came back even stronger than before. The wild swings noticed yesterday, can be explained when one takes into the account the change in estimations regarding a rate hike in December, which after the election dropped to 35%, only to close the day at 80%. 

Currencies:  As mentioned above, the USD plunged initially after the election results. Indicative of the price action, EURUSD spiked from 1.1050 to 1.1300 only to close the day at 1.0950. Similar picture was also seen in USDJPY which initially dropped to 101.30 from 105, only to post new highs at 105.93. The biggest mover of the day was the USDMXN which surged 14% posting record highs. It too however closed the day with only 8% gains, after Trump’s speech. So why did markets quickly reverse the knee-jerk reaction that was seen in the initial stages? There are a number of reasons but here are few: 

  • In his speech Trump noted a substantial spending increase in infrastructure. This is substantially different than the path to growth that is noticeable today which is mainly through monetary policy (keeping rates low so as to improve lending). This will also ensure millions of jobs.
  • Massive tax cuts that were promised by him, are speculated to boost investment and increase the disposable income by people.
  • His words did not include any bravado over foreign policy, walls or deportations. Instead, he tried to unify Democrats and Republicans and people from all races and religions.

So is the volatility over? By far no. First, so far everything was just rhetoric and it remains to be seen if any of the above will materialize. Second, Mr. Trump will soon face the reality of bureaucracy and the politics involved with passing legislation through Congress, even with a majority of the Republicans.

Stocks: Stock market action was brutal. Dow Jones, plunged 800 points, only to close near record highs. The same picture was seen in stock indices around the globe. DAX opened at 10.000 from 10.500 points and closed the day at 10.650 erasing the 500-point loss. According to a Reuters poll, 85% of 62 respondents expected Fed to continue with the rate hike in December despite Trump’s shock win. Chicago Fed president Charles Evans said earlier this week that only a “pretty sizeable” negative surprise could prompt Fed to hold fire again.

Oil and Gold: Gold spiked 70 dollars from $1270 to $1337 but quickly dropped to $1270 again following the reversal that was noticed on the USD and in stock markets after Mr. Trump’s Presidential speech. This apparently calmed the markets and helped boost the USD, putting pressure on GOLD.   The yellow metal is now trading at $1284. OIL closed higher, despite tanking $2 the previous day. That selloff was part of a broad-based market reaction where investors late Tuesday night fled risky assets such as stocks. With the Trump victory, some analysts said there were supportive factors for oil prices such as a potential shift in U.S. policy toward Iran, justifying a higher price.

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