Did the markets just decide a Trump presidency is not all that bad?
A mere indication of a Trump presidency had been enough to send global equities and currencies in turmoil earlier. In fact, when early data suggested a Trump win, Dow Futures had fallen by over 700 points, or around 4%, in intra-day trading. Global equities were in disarray, just as equity strategists had predicted.
But after the final election results were announced, the markets experienced an unusual calmness. At the time of writing, Dow futures are down just 1.2%.
In India, too, the Nifty 50 index had fallen well over 4% in early trading, but ended the day only 1.3% lower—some of it owing to the demonetization process initiated by the government. Does this mean that markets have decided that a Trump presidency is not all that bad?
That seems unlikely. Some investors appear to be relieved that the uncertainty owing to the change in leadership may cause the US Federal Reserve to further postpone rate hikes. According to a Bloomberg report, the market-implied chance of a December rate hike fell to as low as 47%, based on US overnight indexed swaps. That compares to 82% at 5 pm in New York on Tuesday.
Based on data derived from Fed Funds Futures until Tuesday night, the probability of a rate hike had inched up, with investors assuming that a Clinton presidency was on the cards.
But this is akin to holding on to a fig leaf. Whether or not the Fed raises rates, the uncertainty related to a Trump presidency hasn’t gone anywhere. Citigroup’s global macro strategists wrote in an early morning on 9 November note, “Near term we expect yields to fall, equities and emerging markets to sell off. Markets will likely focus first on economic policy uncertainty, rising geopolitical risk premia and threats from Trump tariffs to global trade. To us all negative risks.”
According to market experts, the biggest risk related to the Trump presidency is uncertainty, and investors hate uncertainty. Citi’s strategists said in an earlier note, “Uncertainty alone could hit the economy. Global growth will also be impacted if uncertainty rises.”
But not all investors are as sanguine as broad indices suggest. India’s IT stocks fell further after the election results came in. And the Mexican peso fell to a seven-year low against the dollar. Trump’s win is expected to result in weaker relations with Mexico and hurt its economy.
Harsha Jethmalani also contributed to this story.