Global Markets Trumped by Election Outcome

U.S. dollar fell 3.8% against the yen, the biggest intraday decline since the Brexit referendum

Donald Trump’s unprecedented win to emerge as the U.S. President-elect on November 9th, 2016, has resulted in political aftershocks in the global financial markets, much akin to the Brexit vote, stunning investors after recent polls showed that Hillary Clinton would be the potential winner. Most polls showed that Democratic candidate Hillary Clinton was ahead of Trump going into the vote, after which websites that took bets on the victor had put her odds of winning at 80% or more, as per Bloomberg. However, with the bets now proving wrong, a Trump victory had been portrayed as having the potential to unbalance markets, with the S&P 500 Index futures slide as much as 5% after the results were declared. Brexit was the last major political shock that led to the U.S. equity gauge sliding 5.3% in two days.

In the other notable moves in the financial markets, the Stoxx Europe 600 Index fell 2.2%, the MSCI Asia/Pacific Index dropped 2.6%, and 10-year U.S. Treasury yields dropped three basis points to 1.82% in the market rout. Meanwhile, the Japanese yen climbed versus all major currencies, with the Euro Swiss franc gaining at least 0.7% against the dollar. Gold jumped 2.6%, the most since Brexit, while crude oil slid 1.4%.

Source: Bloomberg
Source: Bloomberg

Major currencies witnessed major post-election choppiness on November 9th, 2016; Mexico’s peso plunging as much as 12% to a record 20.7818 per dollar and was the worst performer among currencies worldwide. Trump’s stance towards U.S.-Mexico relations has weighed on the peso in recent months as traders saw the country’s economy as particularly vulnerable to proposals such as building a wall on America’s southern border, seizing Mexican workers’ remittances and renegotiating the North American Free Trade Agreement.

Other higher-yielding currencies sank, with South Africa’s rand weakening 2.7% and South Korea’s won down 1.3%. Currencies viewed as havens strengthened, with the yen climbing 1.6%. The U.S. dollar fell as much as 3.8% against the yen, the biggest intraday decline since the Brexit referendum. The U.S. dollar also fell 2.4% against the euro and 2.3% against the Swiss franc.

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Less likelihood of December rate hike

In a parallel development, Treasuries rallied as traders saw the likelihood of the Federal Reserve interest-rate increase in December 2016 decreasing to a low of 47%, based on overnight indexed swaps, against a prediction of 82% a day earlier. The yield on the 10-year note declined as much as 14 basis points before paring the drop. Its daily trading range, at 0.18%, was the largest since June 24th, 2016, the day after the Brexit vote.

Source: Bloomberg
Source: Bloomberg

Gold jumps, agri commodities slump

Reacting to news about Donald Trump’s win, gold jumped as much as 4.8% to $1,337.38 an ounce during day trade on November 9th, 2016. Five out of six major industrial metals declined on the London Metal Exchange, after the LMEX Index ended the last session at a one-year high amid optimism surrounding the outlook for demand in China. Aluminum and lead were the worst performers, with declines of 0.8%.

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Wheat, corn and soybean futures on the Chicago Board of Trade slumped more than 1% on speculations that Trump’s win would put pressure on agricultural commodities because of his anti-trade sentiments. The U.S. is the world’s largest exporter of corn and soybeans.

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Global oil markets had a knee-jerk reaction as they always do during times of high uncertainty like elections. West Texas Intermediate oil dropped as much as 4.3% to $43.07 a barrel on the New York Mercantile Exchange before recovering to trade at $44.46 in London. Brent crude slid 1% to $45.56 on the London-based ICE Futures Europe exchange.

m7Economists predict that there will be a rush to safe-haven assets, and money will flow to sectors like gold and less risky options. The global markets are expecting to see a lot of volatility ahead; it may or may not be fundamentally driven.

Trump’s victory is expected to spur a drastic change in U.S. policies when he assumes office as the 45th President on January 20th, 2017. He has argued that a strong dollar damages American competitiveness, and has promised radical change to trade policy and international relations, which is bound to directly impact the greenback. The markets are now reassessing the likelihood of a Federal Reserve interest-rate increase in December 2016, even as volatility is expected to intensify over the next few days and the markets find a new normal.

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