- Investors across the planet have begun to wonder whether a Trump presidency could be positive for the US stock market
- Implied volatility measures also returning to their “normal” level with the 1-week measure easing to 8.72%, compared to 14% a few days ago
- We believe that markets expect a large fiscal stimulus package to be among Trump’s first measures
- On top of that, there is the widespread idea that Trump will do whatever possible to reduce regulations, which actually works in favour of the markets
- We also believe that the tough words spoken against the Fed on the campaign trail will subside now that the election is over
- In the short-run, the Fed will soon be back in the spotlight and despite the fact that markets are pricing a lower likelihood of a Fed rate hike through Fed Funds Futures, US government bond markets are supporting a normalisation of monetary policy
As expected, yesterday’s sharp sell-off, which spread across all asset classes, was short-lived. After opening in negative territory, US equities extended gains on Wednesday with the S&P 500 rising 1.11%, the Dow Jones Industrial Average surging 1.40%, while the Nasdaq was up 1.11%. European equities were no exception as the German DAX ended the session up 1.56%, while the broad Euro Stoxx 600 surged 1.46%. Investors across the planet have begun to wonder whether a Trump presidency could be positive for the US stock market. Indeed, during his campaign, Donald Trump promised he would cut corporate taxes and increase infrastructure spending.
Yann Quelenn, market analyst: “Yesterday was one of those days where a massive sell-off was expected. Upon Trump’s election, S&P futures crashed to a 4-month low. A black day loomed. However, eventually, the markets pared their losses and even finished on a higher note. It seems that Trump’s speech cooled market anxiety as investors realised that it is only when Trump begins his presidency that markets will truly understand what he intends to do. For the time being, Obama remains president until the 20th of January.
Nonetheless, we believe that markets expect that a large fiscal stimulus package will be among Trump’s first measures. On top of that, there is the widespread idea that Trump will do whatever possible to reduce regulations, which actually works in favour of the markets. The latter idea is widely supported by the fact that Republicans now hold power over the White House and congress.
We also believe that the tough words spoken against the Fed on the campaign trail will subside now that the election is over. In the short-run, the Fed will soon be back in the spotlight and despite the fact that markets are pricing a lower likelihood of a Fed rate hike through Fed Funds Futures, US government bond markets are supporting a normalization of monetary policy.” ---
In the FX market, EUR/USD ended the day in negative territory, moving to 1.0930 after hitting 1.13 in the early European session on Wednesday. Implied volatility measures were also returning to their “normal” levels with the 1-week measure easing to 8.72%, compared to 14% a few days ago. The market is a bit lost, especially since Trump’s victory has substantially increased the uncertainty regarding the Federal Reserve’s upcoming interest rate decision.
Elsewhere, most G10 currencies recovered against the US dollar. The Aussie rose 0.58% to $0.7680, the NOK was up 0.72% as USD/NOK slid to 8.2842. The New Zealand dollar was however under heavy fire on Thursday after the Reserve Bank of New Zealand cut the official cash rate target to record low 1.75%. Assistant Governor John McDermott said the central bank is worried about the consequence of the strong Kiwi on the economy. More specifically, he declared that “it [the Kiwi’s strength] is restraining important parts of the economy and it is also holding tradable inflation down to a point we think it is having a downward pressure on inflation expectations”. NZD/USD fell as low as 0.7236 in the early European session before stabilising at around 0.7270. On the downside, the closest support can be found at 0.7110 (low rom October 25th), while on the upside, yesterday's high at 0.7403 will act as resistance.
Today traders will be watching CPI from Germany; industrial production from Italy; manufacturing production from South Africa; retail sales from Brazil; gold and forex reserves from Russia; initial jobless claims and monthly budget statement from the US. Several central bankers will also deliver speeches today: Knot, Hansson, Mersch and Constancio from the ECB; Bullard and Lacker from the Fed; chief economist Andy Haldane from the BoE.