Mourning in America?

Stars and stripes in grunge style marc

  • Global capital markets have been roiled by Trump’s stunning victory, and the Republicans hold of both houses of Congress
  • The implications of US monetary policy are not immediately clear
  • EM currencies are under pressure; the Mexican Finance Ministry and Banco de Mexico will hold a press conference this morning at 8 AM ET

The dollar is mixed against the majors after Trump’s unexpected victory. The yen and the euro are outperforming while the dollar bloc and the Scandies are underperforming. EM currencies are mostly weaker. The CEE currencies are outperforming, while MXN and ZAR are underperforming. MSCI Asia Pacific was down 2.6%, with the Nikkei falling 5.4%. MSCI EM is down 2.1%, with Chinese markets falling 0.5%. Euro Stoxx 600 is down 0.5% near midday, while S&P futures are pointing to a sharply lower open. The 10-year UST yield is up 5 bp at 1.90%. Commodity prices are mostly higher, with Brent oil up 0.8%, copper up 2.5%, and gold up 2.4%.

Global capital markets have been roiled by Trump’s stunning victory, and the Republicans hold of both houses of Congress. The initial reaction was dramatic and severe. The dollar and equities were crushed and bonds rallied as the message from the electorate was clear. However, in late Asia, the markets reversed and early moves were retraced.

Trump’s policy prescriptions were mostly defined by opposition to the status quo. Trump advocates the repeal of the Affordable Care Act (Obamacare) and Dodd-Frank, the omnibus financial regulation.   He wants to clamp down on immigration. These three positions appear to enjoy widespread support among Republicans in Congress. Traditionally, the Republican Party has been more associated with free-trade, but Trump wants to re-open trade agreements. The next focus will be on Trump’s cabinet picks. Speculation begins immediately.

The implications of US monetary policy are not immediately clear. A December rate hike was the most likely scenario, and it still is, provided that the global capital markets are stable. Presently that seems to be the most likely consideration to deter the Fed from hiking.

The euro initially dipped below $1.10 in early and thin Asian activity. It rallied to $1.13 and then reversed. By early European activity was back near $1.11, and then slipped to the upper end of yesterday’s ranges near $1.1050, where it found a bid. The intraday technicals suggest North American operators may push the euro higher.

The greenback was bid to almost JPY105.50 in early Asia, and as the election results began to be clear, it was sold to JPY101.20. It rebounded to nearly JPY103.80 in early Europe. Here too the intraday technicals warn of dollar weakness in North America.

The similar pattern is evident in sterling as well. A rally as the results was becoming evident (~$1.2550) was followed by a sell-off that brought it back toward yesterday’s lows (~$1.2350) by the time London was in full swing. It then recovered (~$1.2430). A move back toward $1.25 as today progresses would not be surprising from a technical perspective.

Risk assets, including the dollar-bloc currencies, have been sold. Asian equities were hit hard. MSCI Asia-Pacific Index fell 2.6% to reach its lowest level since July. The Nikkei shed nearly 5.4%. Chinese shares fared the best, losing only 0.5%.   Asian markets that are open late, like Thailand, have recouped more of their losses.

The Dow Jones Stoxx 600 is off a mild 0.5% in late-European morning dealings after gapping lower at the opening. It closed the gap and is moving sideways, perhaps waiting for fresh directional cues from the US.

The initial flight from risk assets saw the US 10-year yield fall from around 1.85% to nearly 1.70%, but it subsequently rose to 1.96% in early-Europe before consolidating near 1.90%. The curve itself is steepening. The 2-year yield is off almost four basis points to 0.82%, while the 10-year yield is up now up five basis points at 1.90%. The 5-year yields are also lower. Some observers are attributing the steepening to the anticipated fiscal plans of the new Administration. Asian bonds closed broadly higher, catching the risk-off phase. European bonds are mostly lower, but German and Dutch bonds are firmer.

The Brexit shock has been followed by the US electoral surprise. Leaving aside the demographics and the polls, the common element is a retreat from the path of at least the last several decades.   Is continental Europe next? The French center-right party, recently renamed Republicans, will hold a primary on November 20, with the second round on November 27. In early December, Italy holds a referendum on constitutional changes (reducing the role and size of the Senate). Next year, there are Dutch, French, and German elections. The odds of a UK election and even an Italian election are not negligible.

EM currencies are under pressure. As one would expect, the Mexican peso is being hit hardest. After trading as low as 18.16 yesterday, USD/MXN spiked to a new all-time high near 20.78 in Asian trading before settling back to trade around 20 currently. As North American trading begins, all eyes are on Mexico policymakers. The Finance Ministry and Banco de Mexico will hold a press conference this morning at 8 AM ET. Measures to support the peso are likely to be announced. However, with the peso stabilizing, policymakers there may keep their powder dry until the dust settles further. The dilemma is stark, as rate hikes and spending cuts would simply add to the headwinds already on the economy.