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 Thursday 10 November 2016

Market responds to Trump win - AM Bulletin

 

 

Indices Update

Donald Trump clinched the presidency despite being shunned by many within the Republican Party and having never held political office. Or maybe it’s more accurate to say he won because he’s never held political office and the establishment hate him. On top of this victory, the Republicans held on to majorities in both the Senate and House of Representatives.

Global stock indices slumped as it became apparent that Mr Trump was on course to secure enough Electoral College votes to become president. However, all bounced off lows hit during Wednesday’s Asian Pacific session. In fact, the major US indices shot into positive territory soon after the US open. They continued to rally throughout the session, just pulling back a touch prior to the close on mild profit-taking. For the Dow, this represented a low-to-high swing of over 1,100 points, or around 6.7%.

The vast majority of analysts, pollsters and bookmakers failed to predict the outcome - just as they had with the UK’s referendum on membership of the EU. Yet most correctly predicted the market response to Trump’s victory. That is, equity markets and the dollar sold off while precious metals soared. But perhaps mindful of how financial markets recovered after the Brexit vote, investors were quick to jump in on the “buy” side to push up stock indices and the dollar.  This left the Dow, S&P500 and US Dollar Index all back well above levels seen at the end of last week. So, the actuality of a Trump presidency is proving to be less of a concern to investors than the threat itself.

There was also a strong positive response to Donald Trump’s acceptance speech. This was undoubtedly generous and conciliatory in tone and came after a particularly vicious election campaign on both sides. It also came despite a number of inflammatory campaign threats from Mr Trump which many consider particularly aggressive and divisive.

Yet Donald Trump remains an unknown quantity and his supporters will be mindful of the promises he made during his campaign for the presidency. So if it is the case that investors bought the bounce because they believe that Donald Trump is now set to tone down the rhetoric and join the “establishment” they may be disappointed.

The FTSE 100 ended the day 68.7 points higher at 6,911.8

The German DAX rose 163.7 points or 1.6% to end the day at 10,646.0

The US30 closed 256.95 points higher to finish at 18,589.7 The S&P 500 ended up 1.1% at 2,163.3 while the Nasdaq 100 rose 0.4% to close at 4,825.2

Equities

Sainsbury’s (SBRY) reported a 1% fall in like-for-like sales in the last quarter. However, underlying group sales were up 2.1% from the same time last year and profit before tax was up 9.7%, rising from £372 million from £339 million the year before. Competition within the sector continues to be fierce. Against this background the supermarket giant said that it was set to hit its target and deliver cost savings of £500 million by 2017/18. The company added an additional plan for £500 million cost savings for 2018/19. Meanwhile, there has been some criticism over Sainsbury’s purchase of Argos earlier this year. Argos buys most of its goods in US dollars and sterling’s post-Brexit weakness is expected to be problematic. The share price ended the day 6.6% lower at 236.4 pence.

Commodities Update

Crude oil sold off overnight as the Trump victory became inevitable. However, it subsequently rallied along with equities and the US dollar, suggesting that the initial sell-off was nothing more than a knee-jerk, risk-off reaction to the unexpected result.

But as Wednesday’s session progressed, oil came under further selling pressure. This had much to do with US crude oil inventory data. On Tuesday night the American Petroleum Institute (API) reported a crude build of 4.4 million barrels on expectations of a 2 million barrel increase. Then yesterday afternoon the Department of Energy’s Energy Information Administration (EIA) confirmed the API data when it showed a rise in inventories of 2.4 million barrels. Once again, this was above the 1.3 million barrels expected.

Overall, oil should be relatively unaffected by the election result. The most important drivers for the price are supply and demand. In these regards the most significant considerations are currently the outlook for global demand growth together with future production levels. Estimates for global demand growth have shifted downwards recently. This could be set to pick up although a number of economists remain pessimistic in their predictions for global GDP growth. Yesterday China’s trade data showed that oil imports eased a touch in October although they are still up for the year.

As far as supply is concerned, the most important factor now is what happens at the OPEC meeting on 30th November in Vienna. The 14-member cartel is expected to announce details of production cuts and on Monday OPEC secretary general, Mohammed Barkindo underlined the group's intention to reach a deal later this month. However, there are some major issues which have to be sorted out over the next few weeks. Perhaps top of the list is whether any OPEC members will be granted exemptions from an output cut. So far Iran, Iraq, Nigeria and Libya are all demanding that they be excluded. Then there’s the question about which members will shoulder the cuts and how compliance will be ensured. Finally, any reduction in output will prove pretty ineffective if non-OPEC producers simply step up production to take advantage of OPEC’s shortfall in supply. Of course, it’s worth remembering that OPEC members have been pumping as fast as possible over the past few months which could make even a 740,000 barrel per day cut somewhat redundant.

Precious metals shot higher in the early hours of yesterday morning as it became apparent that voting was going Trumps way. Investors piled into both metals as part of a safe-haven move as the dollar slumped. Gold pushed above $1,330 while silver topped $19 at one stage. However, both pulled back sharply as Europe opened for business. The sell-off coincided with a rally in the dollar and as stock markets bounced off their lows. This seemed to follow on from President-elect, Donald Trump’s acceptance speech which was conciliatory and in which he called for unity.

There is also a feeling that the Federal Reserve may opt to keep its key fed funds rate unchanged after its monetary policy meeting next month. The thinking goes that the US central bank may prefer to wait yet again until it has a clearer picture of how Mr Trump’s proposed polices turn out. Yet Mr Trump was elected on a platform that includes extensive tax cuts and a large programme of infrastructure spending. Such moves should boost growth and lower unemployment. They would also be inflationary and so should encourage the Fed to raise rates as there are signs that inflation is already picking up.


Forex Update

There were some big swings in FX yesterday. The US dollar slumped early Wednesday morning after it became apparent that Donald Trump was on course to win the presidency. However, it recovered off its lows following Mr Trump’s acceptance speech which was considered both gracious and unifying. The general feeling seems to be that the more outrageous threats which emanated during the Trump election campaign may no longer come to pass.

There was an initial rush into “safe-haven” currencies such as the Japanese yen and Swiss franc. But it also wasn’t long before these early moves were largely reversed. By early afternoon yesterday the Dollar Index was back in positive territory and trading at a higher level than it ended at last Friday. This suggests that the threat of a Trump presidency was considered more problematic than the fact of one.

Another major consideration is how the Trump win may affect the US Federal Reserve’s attitude to monetary policy. The Fed has been giving out strong signals that they are preparing to raise rates at their meeting next month. However, there has been some suggestion that the central bank may be less likely to hike rates following a Trump win. The argument goes that the general uncertainty which comes after a Trump victory would force the Fed to hold off from tightening monetary policy. However, that seems less of a worry for now. As far as the market is concerned, the CME’s FedWatch Tool (which looks at the weight of money wagered on changes in the fed funds rate) the probability of a December hike dipped slightly to 71.5% yesterday from 76.3% prior to the election.

In other news, Indian Prime Minister Narendra Modi shocked investors on Tuesday (and holders of cash rupees) when he announced that the country was taking all existing 500 and 1,000 rupee notes out of circulation - with immediate effect. The move is designed to curb corruption, thwart counterfeiters and recoup possibly billions of dollars of taxable income stuck in the black economy. The current 500- and 1,000-rupee bills will cease being legal tender, but can be redeemed at banks and post offices until the end of the year.


Upcoming events

Today’s key economic data releases and events include French and Italian Industrial Production. From the US we have Unemployment Claims, Mortgage Delinquencies and the Federal Budget Balance. We also have a speech from FOMC-voting member James Bullard. 

Disclaimer:

Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Category: AM Bulletin


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