Fed Hike Back On With Trump Win

Thursday November 10: Five things the markets are talking about

There are many still trying to come to terms with Trump’s shock U.S Presidential win on Tuesday, while others seem willing to sidestep political and economic debate, believing that with unilateral control, Trump stands a good chance of enacting key elements of his economic agenda.

It’s these investors who don’t see trade wars, just tough negotiations and are content to trade with optimism, believing the new Republican dominance of the next U.S. government increases the likelihood that inflation will be higher in the coming year, and that growth will receive a boost from more government spending and tax cuts.

Nonetheless, much remains unknown and the financial markets are expected to remain on edge for a while due to a lack of clarity about how the president-elect will actually govern.

For now, the market prefers to unwind some of the “rich” risk-off premium.

1. Global stocks rise on wave of optimism

Equities are broadly higher, as the market chooses to focus on the “upsides” of a Trump presidency.

In the U.S yesterday, stock markets closed out reversing earlier losses to end up with the S&P 500 gaining +1.1% and the Dow Jones Industrial Average rising +1.4%.

That theme continued in Asia overnight, Japan’s Nikkei Stock Average gained +6.7%, its biggest one-day gain in nine-months, surpassing the previous nights -5.4% fall. Korea’s Kospi added +2.3% and Singapore’s Straits Times Index was higher by +1.5%. In Australia, the S&P/ASX 200 gained +3.3%, led by commodity stocks.

The market has even shrugged off worries about Trump’s tough rhetoric against China, with the Shanghai Composite Index ending up +1.4%, and Hong Kong’s Hang Seng Index up +2.1%.

In Europe, Euro equity indices have opened sharply higher across the board. Banking stocks are leading the gains in the Eurostoxx, while commodity and mining stocks are supporting the FTSE 100 rise.

S&P 500 futures are trading +0.7% higher.

Indices: Stoxx50 +1.0% at 3,084, FTSE +0.8% at 6,964, DAX +0.8% at 10,735, CAC-40 +1.0% at 4,591, IBEX-35 +0.7% at 8,962, FTSE MIB +1.4% at 17,041, SMI +1.1% at 7,982, S&P 500 Futures +0.7%

2. Crude oil prices steady after Trump shock, gold lower

Oil prices have steadied overnight as the market recovers from its initial shock to Trump’s surprise Presidential victory.

Nonetheless, the markets focus will now shift to OPEC’s meeting in Vienna Nov 30. With the oil market remaining heavily oversupplied, will producers be able to come to a decision on global production cuts?

Brent crude is up +10c at +$46.46 a barrel, while U.S. light crude (WTI) is down -10c at +$45.17.

Yesterday’s U.S EIA report showed that weekly inventories rose +2.4m barrels to +485m barrels last week.

In commodities, many had expected gold to be more of a “risk-off” coveted asset. The precious metal has managed to pare its biggest surge since the U.K.’s Brexit vote in June as an investor’s rush to haven assets has subsided.

Gold is trading little changed from its close, up +0.75% at +$1,287.15 an ounce. In panic buying during U.S voting, gold was trading north of +$1,354 an ounce.

3. Trump Steepens U.S Curve

Does a Trump win take the Fed out of the picture for this year? Nothing has really changed from an U.S economic standpoint; hence the Fed can afford to do its “token” December Fed hike, especially now that the market sees the potential of Trump’s spending pledges has sent domestic inflation expectations to their highest point 17-months. Dec Fed fund futures odds are back to +80% from yesterday’s low of +41%.

U.S. 10-year note yields have declined -4bps overnight to +2.01%, after soaring +20bps in yesterday’s session.

Money markets are pricing in “Trump-economics” – a faster pace of Fed rate hikes on the back of populous dislike of tight fiscal, easy monetary policy.

Elsewhere, Aussie bonds have joined the global selloff, lifting their 10-year yield by +28bps to +2.50%. The rate on German Bunds rallied for a fourth consecutive day to +0.22%.

Note, keep an eye on Italy, it has a constitutional referendum vote on Dec 4 and Italian government debt could come under much more pressure with Trump’s victory amid rising populism.

4. Big dollar rebounds

The mighty buck continues to rebound after the markets flight to safe haven assets gets unwound. The market certainly overextended itself early yesterday on fears of Trump’s potential protectionist policies.

The dollar is content to take back some of the past 24-hours over extension, supported by the market focusing on the prospect of increased fiscal spending and less regulation that will boost risk appetite. Further tax cuts and fiscal spend leads to higher inflation, and reason why the fixed-income market is pricing in more Fed hikes, starting with next month.

Rate differentials has the EUR/USD trading down -0.2% at €1.0914, having briefly risen above $1.13 after Trump’s win. USD/JPY is trading up +0.3% at ¥105.94, while GBP/USD is down -0.2% at £1.2423.

5. RBNZ cut on uncertainty

Is it a possible trend from Tier 11 central banks? While not explicitly referring to Trump’s Presidential victory when cutting interest rates by -25bps to +1.75% as expected overnight, the RBNZ has cited uncertainties about the global outlook.

Like many, the RBNZ will need time to see what actually happens and how that will change the Kiwi inflation outlook. “Political uncertainty remains heightened and market volatility is elevated,” said Gov. Wheeler. “Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly,” he added.

Like many others, the RBNZ will require time to see what actually happens and how that will change the New Zealand inflation outlook.

NZ$ initially rose to NZ$0.7360 on implications of a bottom in rates, and has now fallen to NZ$0.7240 on comments from RBNZ’s McDermott clarifying that rate cuts and interventions remain under consideration.

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