Donald Trump is on course to be the next president of the United States of America and markets are freaking out. President Trump said his election would be bigger than Brexit – and as far as financial markets are concerned, that is already true.
European stocks are projected to open between 4 and 5% lower, wiping off billions in market cap in one fell swoop of Trumpism. Since the US is the world’s largest economy and the US dollar is the world’s reserve currency, it still holds true that when the US sneezes, the rest of the world catches a cold.
Before Trump even had it in the bag, US stock markets futures were halted limit down until the New York Stock Exchange and NASDAQ open this afternoon. The price of gold has soared nearly 5% with the US dollar dropping 2% against a basket of currencies. The Mexican peso, which has proven the most sensitive to a Trump victory crashed double digits after an ill-conceived relief rally earlier in the week.
One saving grace for the UK will be a relief in the selling of the British pound while the US dollar is under scrutiny. The pound could find itself back to 1.30 to the US dollar in the next few days, a level that many see as export-boosting but not destabilising nor too inflationary.
The writing was on the wall when Donald Trump won the big key swing states at around 1am GMT and the markets never looked back.
The parallels of the Trump victory to the EU referendum are uncanny and manifested themselves in very similar price action in markets. On both occasions there was the slump in risky assets two weeks out, followed by a relief rally in the preceding days then a crash as the results came in.
As Donald Trump is an outsider and represents real change, this is a source of uncertainty for wealthy investors and large companies, who benefit from the status quo. Democratic presidents are generally perceived as less business-friendly, but Hillary Clinton is part of the establishment, and that posed a lot less of a threat to big business.
Looking forward- and desperately search for some silver lining for markets, if the Brexit parallels are to continue, then markets could rebound in the following weeks. The uncertainty created by a Trump victory has caused stock markets to fall, but declines could be limited. At the moment the global economy is slowing, but stock markets are not far off record highs because of loose monetary policy. Any uncertainty would be a convenient reason for the Federal Reserve to delay hiking interest rates again. So the ‘Yellen put’ effect could mean a Trump victory is positive for the stock market.
The next US president will still be the ‘leader of the free world’ and will have a large bearing on the future of the US economy, and thus the global and UK economy. In stock market terms, the economy is playing second fiddle to central banks, so it will be the response of the Federal Reserve, and to a lesser degree the Bank of England, to the election that ultimately dictate the direction of the stocks, bonds and currencies.
Equity market calls
FTSE100: to open 248 points lower at 6,595
DAX: to open 424 points lower at 10,058
CAC40: to open 187 points lower at 4,289
DISCLAIMER: CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed.
No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.