Trump occurred: What it suggests for stocks, bonds, other markets

Donald Trump will be the nation’s president-elect. Wall Street investors have allow that breathtaking end result in the U.S. race for your highest seat in the land wash over it for all of about two seconds ahead of wagering broadly that there may even now be dollars to get produced. Stock markets have primarily soared, together with the Dow Jones Industrial Common DJIA, +0.21% touching a second straight record close plus the S&P 500 SPX, -0.14% holding steady on Friday.

But, the dawn of a new political era has lasting implications that are yet for being felt, especially since the real estate billionaire nonetheless needs to cobble together a cabinet, decide on a game plan to implement some of his unconventional policies in his first 100 days in office-and yeah, go through an inauguration.

The markets have seen notable moves as investors reposition in anticipation on the new administration and try to assess what a victory by the billionaire means. Here are some from the areas within capital markets that are most likely to be influenced or already have seen moves on the heels of Trump’s victory of Democratic opponent Hillary Clinton:

U.S. equities
So far, stock markets are betting that Trump’s fiscal polices, if implemented, would be bullish for stocks that have been waffling up until recently. The thinking is that a plan to increase infrastructure spending and cut corporate and personal income taxes will boost growth prospects, which is bullish for stocks. That notion is one reason the Dow hit a record at on Thursday of 18,807.88 (see chart below).

The Dow is on pace for its biggest weekly rise in 5 years, which is surprising considering that some market pundits had predicted catastrophe if Trump emerged victorious. However, many Wall Street investors appeared to awaken Wednesday morning after Election Day emboldened.

Here’s how market strategist at Goldman Sachs, including analysts Jan Hatzius and Zach Pandl, put it in their research note published Nov. 10:

Just two days after the election and more than two months before he takes office, president-elect Trump has already left a significant imprint on financial markets. In contrast to many predictions just before the election-including our own-and unlike the aftermath on the Brexit vote while in the UK, the surprising outcome has generally lifted risky asset prices as well as nominal interest rates.

Bonds
Government bonds were rocked inside the wake of Trump’s victory. The selloff has accelerated a trend that began just ahead of Trump won the election. The yield on the 10-year Treasury note TMUBMUSD10Y, +0.00% the benchmark U.S. bond, is up 33.5 basis points this week, marking its largest weekly gain in 3 years and is at its highest level since January, according to Dow Jones data. The rationale is that Trump’s policies will provide a boost to inflation, the enemy of long-term bonds, because it erodes the value of interest payments.

Also, the prospect of economic growth picking up under a new administration makes bonds, perceived as relatively safe assets, less appealing than stocks, which tend to offer more risk in exchange for richer returns and prosper with hope of reflation and improving economic prospects. Also, more government borrowing usually means more debt will need to get issued by the Treasury, increasing the supply of bonds and weighing on prices.

As the Goldman analysts note, inflation expectations are picking up. One measure of that are 10-year, 10-year forward rates-in other words, what Treasury inflation-protected securities imply the Labor Department’s Consumer Price Index will gain annually from the 10 years starting 10 years from now (see chart below):

A modicum of solace for bond traders comes from one fixed-income investment pro: “I do believe this rate rise is about 80% with the way through-at least this leg of it,” said Jeff Gundlach, founder of DoubleLine Capital, in an interview on CNBC on Friday.


Still, some strategist see Treasurys as a good investment for that long term because they limited scope for yields to rise and only a gradual increase in official interest rates by the Federal Reserve. The central bank is widely expected to deliver its next rate rise at its December meeting.

“Today’s yield level is 50 basis points versus pre-election levels, matching the behavior seen during the 2015 down trade,” wrote HSBC analysts led by chief U.S. economist Kevin Logan in a Nov. 10 note. “The risk of higher yields should be limited from this point, given the FOMC’s rate guidance, in our view.”

Currencies
The ICE U.S. Dollar Index DXY, +0.14% is up 2.1% this week, representing the largest weekly rise for that gauge in the dollar’s performance against a basket of six currencies since November 2015, according to FactSet data. Higher rates and a bigger budget deficit are seen as positive for your dollar in near term. But HSBC and others point out that other aspects of Trump’s policies, including an aggressive immigration crackdown, could hamper growth and hurt the dollar.

HSBC doesn’t seem particularly optimistic of what is read as the billionaire’s isolationist stance and also the prospect of higher tariffs on goods from abroad. “However, a weaker [dollar] might be part of Trump’s efforts to spur manufacturing; a tougher immigration policy could curtail potential growth, while a squeeze on real incomes from higher tariffs could tip the economy towards recession. This, combined with a U.S. isolationist stance, would likely encourage foreigners to sell U.S. assets,” they wrote.

Peso problems

In the currency market, moves by the Mexican peso received the most attention in advance of and after Trump’s win, and for a good reason. The Mexican peso USDMXN, +1.4980% is down more than 9% this week against the dollar and is off about 21% year to date at 20.86. The moves inside the peso and other emerging-market currencies, have been precipitated by Trump’s anti-immigration and tougher stance on trade.

Oil
Trump has expressed a pro-fossil fuel stance. His talk about ramping up coal and oil production has placed pressure on crude-oil prices, which have been dogged by concerns that a global glut will be exacerbated by the president-elect’s energy platform. December West Texas Intermediate oil trading on the New York Mercantile Exchange CLZ6, -3.45% the U.S. benchmark, is on track for a weekly loss of about 0.8%, while January Brent LCOF7, -2.88% is on pace to fall 1.5% lower this week. Meanwhile, coal, as gauged by the VanEck Vectors Coal ETF KOL, -0.66% is up 3.7% this week.

Gold and copper
Gold prices were on track for their largest weekly drop in more than three years on Friday. The stronger dollar has also diminished the allure of traditional haven assets like gold GCZ6, -3.08%

This wasn’t how it was meant to end up for your yellow metal, with prognosticators forecasting carnage in stocks and a rally in gold if Trump beat Clinton.

“The only certainty just before Tuesday’s U.S. election was that a victory for Trump would hurt stock markets and send gold soaring,” said Adrian Ash, head of research at BullionVault. “That proved right for just 12 hours. One ghosted speech and a few days off Twitter was all it took for funds managers to pile back into equities and dump gold.”

As for copper, talk of increased infrastructure growth has boosted appetite for industrial metals like copper. Cooper also is viewed as a gauge of the prospects for that U.S., and global, economy, given its wide use in construction.

Copper HGZ6, -1.76% were set for a weekly gain of nearly 11%-on track for its best weekly rise in 5 years, according to FactSet data.

The big question surrounding these asset moves is whether they are sustainable and to what extent Trump’s proposals will come to fruition.