Donald Trump's big election win rocked world markets overnight surprising many traders, especially those who had been sucked in by Monday's false relief rally. His victory speech took a much more Presidential tone and helped to calm the markets somewhat helping US indices to reverse about half their overnight losses. We're still waiting to hear from Hillary Clinton.
Don’t be surprised to see a second wave of action in stocks this morning around 9:30 am EST when US exchanges reopen and the broader US investing public gets a chance to react to the big overnight developments.
Overnight market moves were as I expected would happen overnight in a Trump victory situation with US stock markets and the Mexican peso plunging, US dollar falling and defensive havens like gold and JPY soaring.
This morning finds US index futures still lower with Dow futures down 2.2% S&P futures down 2.5% and NASDAQ futures down 2.9%. Overseas, the Nikkei fell 5.3%, the Dax fell 1.5% and the FTSE is down only 0.5%.
The Mexican peso took the brunt of the currency action taking a double digit percentage plunge and is currently down about 8.4% trading near 20.00. CAD is also trading lower likely on concerns that Canada could get caught in the crossfire of a NAFTA renegotiation which could create economic uncertainty for America's largest trading partner even though Trump's sights have mainly been on Mexico.
Other major currencies have been taking advantage of a weaker US dollar particularly defensive havens like JPY which soared 3% at one point overnight and gold which is currently up 2.0%. Speculation of a December interest rate hike has faded a bit but even with the future of Fed Chair Yellen in question and the influence of dovish Fed Governor Brainard cratering, a rate hike remains favoured by President-elect Trump. I still think we will see three rate hikes between now and December 2017 even if the first one is delayed until after the inauguration.
As I had suspected, Donald Trump was polling about 3-5% below his actual support and the high level of anger at the establishment personified by the Clintons and Obamas helped propel him to victory as I had forecast. I was also right about the markets being almost totally unprepared for his victory even with the Brexit experience still fresh in traders’ minds. A 5% decline in the stock market is not unusual as a new US President comes into office but I admit even I was surprised to see it all happen in 3-4 hours rather than 3-4 weeks.
I also had forecast a Trump win would be a Brexit level surprise, for some markets this has been even bigger than Brexit. The main difference has been that in the UK the currency, the GBP took the brunt of the reaction relative to stocks. In the US, stocks have taken the brunt of the reaction with the currency reaction taking place in MXN
It's not unusual to see volatility in the markets when the party controlling the White House switches. With the Republicans also holding on to their majorities in both houses of Congress, the public has given Donald Trump and the Grand Old Party a clear mandate for change. Until we learn what forms that change could take we could see continued volatility in stock markets and higher interest in defensive havens.
Due to our proximity to the US and sensitivity to the US economy the changes likely to come may also impact trading in the Loonie and Canadian stocks. The impact may differ between sectors, however. Gold producers could rally today along with the metal price and Energy stocks, particularly pipelines, could benefit from the Republicans friendlier energy and climate policies.