By Rob Colville on November 11, 2016 in
It seemed almost unthinkable, really, yet much to the surprise and dismay of many, a Trump presidency has become an unlikely (and unpopular) reality. Markets around the world were thrust into a tailspin even before the stunning US election result was made final earlier this week, and while cooler heads and upward price action has since prevailed, traders are scrambling to digest the news and try to understand the short- to medium-term impact of one of the nastiest and most divisive political event risks in memory.
This is no longer a joke, my friends, nor some odd dream that will just fizzle out on its own. Instead, a Trump presidency, and all the uncertainty and policy changes that could likely follow, must now be baked into the market’s proverbial cake. That’s why we wanted to take a look today at the potential impact of a Trump presidency across a host of key markets, asset classes, and maybe more notably, on people, from traders to policymakers and important stakeholders the world over. Here’s what to watch for, and a few pieces of guidance designed to keep you safe and profitable as the US will soon inaugurate a most controversial, new President.
As an outspoken critic of the Federal Reserve—and practically everything else—Trump has stated that he would work to limit the US central bank’s role in manipulating interest rates and using hands-on policies to artificially prop up the US dollar (USD) and stocks. By this measure, a Trump presidency could well lead to less involvement by the Fed, higher interest rates, and comparatively tighter monetary policies.
The dollar, alongside US and world equities, was initially hit hard by the news, not to mention the mass of uncertainty that resulted from the election of a political outsider whose policy stance is vague, at best, and who seems dangerous and combative to millions in the US and the world over.
So how and why did the dollar recover its initial losses so quickly? Well, once the knee-jerk reaction was over, cooler heads prevailed following a compassioned speech from Mr. Trump, where he discussed the need for unity and working together to stimulate the US economy. A massive infrastructure spending bill during Trump’s first 100 days in office may be aimed at that initiative, so as we saw following the June Brexit vote, once markets and traders had a bit of time to recalibrate expectations, the result was a return to more “normal” price action…for now, at least!
Markets are also being cheered by what is perhaps the most noteworthy factor about the Trump presidency: That there will be unified political party control in the White House and Congress, a condition seen only about one-third of the time in the last 50+ years. This will undoubtedly enable the passage of new legislation, effectively ending what’s been 8 years of political gridlock in the US.
So fear and opposition aside, markets (and traders) are adjusting to the reality that change is coming, and those who are buying are optimistic—again, for now—that the changes brought on by a Trump presidency could bring growth and new catalysts for US dollar strength.
It’s been a bit surprising to see world currency markets shift so quickly to “risk-on” little more than a day after going decidedly “risk-off” once the mere likelihood of a Trump presidency began to increase. Currencies like the euro (EUR), Swiss franc (CHF), and to a slightly lesser extent, Japanese yen (JPY) are, and will continue to be, among the biggest beneficiaries from risk-off posturing. In the event that news or further controversial comments from Trump cause a new round of volatility and USD losses, expect to see safe-haven flows into these currencies especially, and even though the British pound (GBP) has a post-Brexit dynamic all its own, it too could be an attractive trade target.
Conversely, the Canadian dollar (CAD) and Mexican peso (MXN) are facing headwinds due to their nation’s geographic proximity to the US, not to mention their status as key trade partners. Both sustained losses alongside the US dollar when news of a Trump presidency took hold. And whether it’s Trump’s talk about a Mexican border wall, or calls for scrapping current US trade deals and renegotiating new ones, US allies and trade partners near and far are wondering how the Trump presidency will impact foreign policy and trade relations going forward. That, of course, creates a degree of uncertainty for a whole host of major and more exotic currencies, and as we’ll now examine, US and world equity markets as well.
Again, once beyond the initial shock and emotionally-driven fears that a Trump presidency would somehow spell the end for Democracy, if not cause a financial crisis or the end of the world itself, something almost as surprising as Trump winning the election happened: US and world equities rallied in response:
The US S&P 500 Index recovered to reach fresh, two-month highs.
Japan’s Nikkei Index reached 5-month highs.
And, aided in part by a key, 50% Fibonacci support level, France’s CAC40 Index reached highs not seen in the last 7 months.
Now, this is not necessarily a harbinger of things to come. Both US and select world equity indices are trading at very high valuations from which they could easily retrace lower. However, just knowing who will be assuming the office of US President alleviated uncertainty, and when you factor in the unified Republican Congress and expectations for massive government spending coming soon, we have a potential bullish catalyst for companies in wide-ranging industries, everything from materials to defense, energy and technology, and many more. And that, for now, is why stocks have rallied.
The downside, you wonder? Well, it’s full of possibilities, too, many of which stem from Trump’s uncertain foreign policy stance. Will there be any escalation in tensions with Russia, Iran, and North Korea? Could Trump somehow pursue aggressive trade wars with low-cost producers like China and Mexico? Will there be a large show of force against ISIS and the ongoing war on terror?
Geopolitical risks such as these are forever prevalent, but we could see new developments at any point during the Trump presidency. Needless to say, any or all would have a huge impact across US and world equity markets.
Admittedly, millions of people, myself included, are still trying to come to terms with how the US election has ultimately shaken out. I realize more each day, though, that regardless of politics, we can navigate a changing trading landscape together. So join the Lazy Trader community for timely trade ideas and video updates, analysis and continuing education, and helpful tools for trading the markets in these, or any, conditions. Please click the banner below to begin your no-risk trial membership today!