For the third time in 18 months, we have seen a shock to the geopolitical system that upended conventional wisdom and caused a reset of global financial markets. The election of Donald Trump to the U.S. Presidency follows the surprise result from the U.K. general election in 2015 and of course the Brexit referendum in June.
If markets learned anything from Brexit, it is that extreme moves are often punished. In the U.K. for instance, economic indicators – with the British currency as the notable exception – have returned to pre-Brexit levels.
Certainly a special mention needs to be made regarding the Mexican peso. Overnight Tuesday, the peso lost 12 percent of its value in two hours, only to see it regain almost half of its loss by Thursday morning. The only other time we have seen that kind of market action was during the worst part of the 2008 credit crisis.
Outside of that, the immediate aftermath of this week’s election was sharply lower equity levels, lower bond yields and a lower dollar.
But by the U.S. market open on Wednesday, those moves had pretty much reversed, with U.S. bond yields moving up during the day to levels last seen in January. European bonds yields rose to levels not seen since the spring, and it was the same story with the U.S. dollar.
Clearly, this market reaction was not the same as Brexit. There are two reasons why markets recovered so quickly:
- Economic policies: The market had discounted so many negative factors for a Trump victory due to some of his unconventional policy statements. Now it seems they are trying to focus on some of the positive aspect of the outcome. So far, the market seems to be leaning toward a positive yield curve where long-term yields are higher. This is due to some of Trump’s stated fiscal stimulus policies, such as tax cuts and infrastructure spending. With respect to some of his more negative policies such as trade, markets feel they won’t be implemented any time soon.
- Political unification: Given the personality clashes during the election campaign, many feared that uncertainty about the results might drag out. Instead, we saw both Trump and Hillary Clinton, together with Paul Ryan and President Obama, strongly issuing calls to unite for a successful transition and strive for a greater America. The market was relieved at that outcome.
Our View: Over the long term, there is obviously a great deal of uncertainty as to which policies a Trump administration will implement. There will be a great deal of debate in the meantime, but for now markets are looking on the positive side.
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