Daily Market Color

Widespread Volatility in Risk Assets as Trump Presidency Becomes Reality

Donald Trump’s victory in last night’s election was met with wave of volatility throughout all asset classes that reminded many investors of the immediate hours following the U.K.’s vote for independence in June.  An initial flight to safety gave way to a rise in risk assets as global markets attempted to predict the future impact of Trump leading the world’s strongest economy.
US stock market futures plummeted late Tuesday night into Wednesday morning immediately after Trump was reportedly leading and favored to win the election.  Dow Jones futures initially fell more than 800 points while S&P 500 futures dropped as much as five percent before triggering the after-hours automatic trading halt.  However, similar to the Brexit situation, equity markets managed to recover all losses shortly after exchanges opened in the morning and turned even higher into positive territory as the trading session went on.  Leading the way were financial and pharmaceutical stocks, whose shares stand to benefit from the absence of stricter regulations that were projected to be instated had Clinton taken office.

Treasury yields also fell at the onset of Trump’s shift towards winning the election as investors demanded safe-haven assets amid the uncertainty.  Yet Treasury prices reversed course over time, producing a sharp steepening of the yield curve, with yields on 10- and 30-year notching their greatest gains of the year.  Large jumps in the yields of long-term maturities were driven by inflationary concerns stemming from the expected increase in fiscal stimulus in the Trump regime.  The increase in volatility has prompted the question of whether the Fed will continue to raise rates in December as previously expected.  Fed fund futures currently indicate a 75% probability of a 2016 rate hike, after dropping below 50% during the early hours of the day.  Throughout his campaign, Trump had showcased himself as a critic of monetary policy in stating his belief that Yellen held rates too low during Obama’s tenure.

The US dollar continued the trend of falling overnight before surging throughout today’s trading session.  The dollar gained as much as 1.1% against major currencies, matching its largest gain since the British Referendum vote.  The Mexican peso predictably depreciated to a record low following the election while the Canadian dollar weakened to nine-month lows.  The Japanese yen, after initially gaining as much as four percent overnight, fell against the US dollar to its lowest level since the end of July, reaching 105.8 JPY/$.  The euro also lost value against the dollar, trimming roughly 0.75%.

In the commodity sector, prices of gold experienced the opposite flow.  Gold futures jumped as much as five percent from Tuesday’s settlement once the uncertainty surrounding the election began to mount, but has since pared its gains to trade nearly even on the day.  On the contrary, oil prices posted early losses before following equities into positive territory with Trump’s effect on global energy demand unable to be predicted.

All three major US stock indexes finished up 1.1%- 1.4% while the yield curve continues to dramatically steepen 6-26 bps across the curve.  WTI and Brent crude finished up near 0.5% on the day at $45.2/barrel and $46.3/barrel, respectively.

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