If a week is a long time in politics then 24 hours in markets is even longer, given the extent of the moves seen in the last day or so.
Having rallied hard on the prospect of a Clinton victory on Monday, stock markets then sold off sharply as the realisation of a Trump victory dawned. We then headed back higher again after Trumps acceptance speech showing that we do indeed live in strange times with the Dow closing at a new record high in the process, a simply astonishing thing to see given that at one point yesterday we were looking at the prospect of an 800 point decline.
This remarkable turnaround in US markets looks set to deliver a positive open for European markets this morning, after Asia markets also carried the positive momentum of yesterday over, with the Nikkei 225 up over 6% on a weaker yen.
We also saw US treasuries sell off sharply with the 10 year yield hitting its highest level since January, up over 20 points on the day. Gold which had rallied sharply in the initial aftermath of Trump’s win also saw all its gains evaporate as the US dollar swept all before it.
A huge number of unanswered questions remain, including what type of President Donald Trump will be, the one we heard on the campaign trail, or one tempered with the enormity of the task in front of him and the expectations that go with that?
On the plus side, the administrative logjam at the top of US government that has been a constant irritant for the last few years is now likely to be a thing of the past given that the Republicans now control both the Senate and Congress which means, given Trump’s acceptance speech yesterday that we could see some form of fiscal stimulus in the form of infrastructure spending, as he sets out his future plans.
This may well explain the rise in yields along with the rise in the US dollar which may well be predicated on the premise that Mr Trump may well cut taxes, to encourage US corporates to bring their overseas profits back into the US, in the form of a new Homeland Investment Act.
The first Homeland Investment Act in 2004 saw the US dollar rise sharply as US business were given a tax holiday on US dollars held abroad in an attempt to promote inward investment, as well as R&D and new jobs.
Even allowing for all of this Mr Trump remains a huge unknown quantity as a politician which means he is unpredictable and therefore prone to gaffes, which could cause significant market volatility on its own. As a business man these gaffes may not matter, but as President of the world’s biggest economy and the free world they do.
This suggests that the prospect of further volatility, in what has been a tempestuous year for global investors, particularly with the Brexit surprise still fresh in the memory.
What this year’s events have taught us is that the status quo is no longer acceptable to a lot of local populations, and with Brexit and now Trump, the direction of travel could well offer ominous signs for the future of Europe going forward.
This howl against the so-called establishment could well encourage the similar growing movements currently gaining ground in Europe, in Italy, France, Holland and to a lesser extent Germany, all of which face political challenges in the coming months.
The temptation would be for European leaders to coalesce around their default position of more Europe, and this could be a mistake, as this is precisely what people are pushing back against, with the next key test on the 4th December and the Italian referendum.
Of more concern is that today’s events could mark the next stage in a trend that is starting to gain momentum. If that is the case then the upcoming events in Europe could mark the next stage in this trend and prompt real concerns about the future cohesiveness of the EU itself, which EU leaders will ignore at their peril.
EURUSD – despite a spike up to 1.1300 yesterday the euro has slid sharply breaking below the 1.0950 area and opening up a test of the October lows at 1.0850, and potentially trend line support at the 1.0720 area.
GBPUSD – continues to find support above the 1.2330 area and while it does so the risk of a move through this week’s peaks at 1.2560 remains a possibility. A move through 1.2330 opens up the potential to revisit the recent lows near the 1.2100 area.
EURGBP – despite a brief spike up to 0.9026 the euro slid back sharply dropping through the 0.8850 and heading towards the 0.8780 area. A recovery back through the 0.8960 area is now needed for a return to the 0.9050 area. Further losses look possible towards 0.8680 while below the 0.8850 area.
USDJPY – despite a drop down to 101.20 the US dollar has rebounded sharply and could well head towards the 200 day MA at 106.66, having taken out the October highs at 105.50. we need to hold above the 104.70 area for this to unfold.
