What analysts at UBS, Morgan Stanley, HSBC, and more say about President Trump
Republican Donald Trump has shocked the world by becoming the 45th President of the United States.
The result has left financial markets reeling around the world with most pricing in a win for Democrat Hilary Clinton, who had a projected slim lead going into the vote.
Stock markets are now tanking and currencies are jumping against the dollar.
Analysts at investment banks are beginning to react to the shock victory, exploring what it will mean for global stock and currencies markets.
Here’s what they think is about to happen:
Chief US economist Kevin Logan says: “We would expect a Trump Presidency to lead to major changes in federal fiscal policy, with lower taxes, higher deficits, restrictions on trade and the international flow of capital, and potentially a sizable reduction in the labor force if Trump’s deportation plans are put into effect.”
HSBC’s US head of FX strategy Daragh Maher says: “The risk-off knee-jerk reaction to a possible Trump victory is already underway. It is likely to be sizable and to persist for some time as the market scrambles to digest what would be a surprising and game-changing result.
“The degree of FX impact from this potential election result hinges on whether Trump delivers on the bulk of his campaign promises. This may not be the case but the market will have to price in some possibility that each component would materialise. These probabilities will shift over time, depending on Trump’s rhetoric and the degree of support coming from a Republican-dominated Congress.
“In the end, this is a potentially game changing result for the FX market and quite possibly gold. The near-term price action would be dominated by the risk off mood, heightened volatility and uncertainty. The medium-term implications would be determined by the pace and scale of policy implementation by the Trump administration.”
Deutsche Bank: ‘It will reinforce the backlash against globalisation’
Deutsche Bank strategist Jim Reid says: “A Trump win is likely to be viewed negatively across a wide range of assets in the short-term but the range of medium-term outcomes are much wider. It increases the chance of higher fiscal spending but it will also reinforce the backlash against globalisation and associated forces of which migration policy and trade are obviously likely to be heavily scrutinised.
“So as the trend is already pointing to, expect lower risk assets at first, lower bond yields on a flight to quality but then higher yields once his spending plans are digested and an equity market that might at some point benefit from reflationary policies but with greater risks (lower trade and global openness) and higher volatility.
“It’s very easy to say this is a big negative for the global economy but current policies around the world are perpetuating the soporific post-GFC [global financial crisis] recovery. A shake up is badly needed but whether Trump is the right version of the shake up is open to debate.”
Fidelity: ‘Calls into question the pillars of the post-WWII settlement’
Dominic Rossi, Fidelity International’s Global CIO of Equities, says: “We are heading into a world of unprecedented political risk which calls into question the pillars of the post-WWII settlement. It’s unsurprising investors are heading for cover.
“The immediate sense of bewilderment at the shift rightwards in American politics will need to give way to a more sober risk assessment. The immediate impact will be on the Fed. The probability of a hike in interest rates in Dec, followed by two further hikes 2017, has fallen sharply. The dollar which has been trending higher in anticipation, has consequently reversed. Both were threats to the bull market, and these have now been postponed. Monetary policy will remain accommodative.
“However, these known financial risks have been displaced by an unprecedented level of unknown political risks. We can only speculate whether Trump will follow through on his more protectionist slogans with substantive policies. Investors, particularly those overseas, will stand back and wait.”
Jefferies: ‘The main risk is monetary policy uncertainty’
Chief Global Equity Strategist Sean Darby says: “The Republican/Donald Trump victory would mean a knee-jerk drop in the dollar and fall in US indices. However, the weak dollar would actually help the bulk of the S&P 500 given that around 35-40% of revenues come from overseas.
“Although there would be some uncertainty over monetary policy, the Fed is unlikely to be deterred from raising rates in December. It should be remembered that Donald Trump sought for the US corporate tax rate to be slashed. Tax cuts get spent! The share of labour vs capital is likely to grow and this is good news for consumption. We remain bullish on Gold shares given that real rates would probably be negative under Trump. Equally, the yield curve is likely to be steep, reinforcing our bullish view on US banks.
“A more interventionist policy towards trade ought to help domestic intermediate producers (we like materials). We have highlighted before that both parties had committed to infrastructure investment and that the government purse strings had already been loosened. The main risk is monetary policy uncertainty and unwinding tight credit spreads.”
RBC Capital Markets: ‘The fundamental reality is that we don’t know what kind of US we are now faced with’
RBCCM Global Research team says on the implications for US markets: “The kneejerk reaction will probably be dominated by a typical risk-off move, though the USD positive impact would be limited by markets pricing out the Fed hike that is 70% priced for this year.
“Longer term our FX strategists would see Trump as positive for USD strength via the potential for a tax cut on retained earnings abroad. The 2015 Homeland Investment Act was particularly negative for GBP which may put downward risk on our 2017 forecasts. RBC current FX forecasts are for EUR/USD of 1.08 by Q1 2017 and GBP/USD of 1.15 by Q1 2017.
“Volatility will almost certainly increase; the fundamental reality is that we don’t know what kind of US we are now faced with given the lack of policy detail through the campaign. Potential outcomes range from a pro-growth conservatism which could ultimately be positive for markets to a more nationalist-protectionist outlook which largely would not be. Only time will tell. We expect valuation discrepancies will open up in the meantime.”
Morgan Stanley: ‘Financials could sell off in the short term’
Strategists Michael D Zezas, Andrew Sheets, and team say: “Given the uncertainty, we position for several policy themes: 1) Trade policy: We like going short the open Asian economies, and like buying USD/CNH and USD/KRW.
“2) Tax-reform-driven stimulus: We like going long corporate credit and taxable munis vs. tax-exempt munis. We would also expect steeper yield curves and higher rates volatility. With fiscal expansion set to steepen curves, we believe the dip in USD/JPY is a medium-term buying opportunity.
“3) Lower regulatory risks: We expect Pharma to outperform. Financials could sell off in the short term, but we would also expect out performance in the medium term.”
Nomura: ‘Market expectations for December rate hike have been declining quickly’
Bilal Hafeez and the Global FX Strategy team say: “There are two lessons to learn from previous market reactions to US election results. The first is that, historically, US equity markets have tended to perform well in the face of political deadlock (split parties between Senate and House) and under perform with a “full set” (one party holding both the House and Senate with the Presidency).
“This morning we find ourselves with Trump the Republican candidate as the new President elect who will receive a “full set” with Republicans retaining both the House and the Senate. A scenario that typically has seen risk markets lag behind.
“Market expectations for December rate hike have been declining quickly, and the yield curve is bull steepening in the US.”
UBS Wealth Management: ‘Fundamentals will outweigh political uncertainty and US stocks can rebound’
Global Chief Investment Officer Mark Haefele says: “The market reaction to the outcome, in our view, will come in two stages.
“A reflexive flight to safety has already occurred, with Treasury bond prices rising. The US dollar has declined around 1% on a trade-weighted basis, while safe-haven currencies like the Japanese yen (+2.9%) rallied against USD. And gold also climbed 3.6%. Risk-sensitive assets lost ground – S&P 500 futures fell 4.2%, and the Mexican peso shed 9% against the dollar.
“While these first-round effects are certainly disconcerting, we expect the US equity market to recover over the medium term. CIO believes fundamentals will outweigh political uncertainty and US stocks can rebound on the back of accelerating earnings per share (EPS) growth. We forecast EPS to rise from 1% this year to 8% next. Selected industries could benefit from the possibility of more lenient regulation – particularly the financial services and energy sectors. Others businesses, especially those focused on national defense infrastructure, could enjoy advantages from more expansionary fiscal policy.
“Still, policy uncertainty may raise overall equity-market volatility, and lead to market dislocations that short-term investors might look to exploit.”
Societe Generale: ‘Next to watch is Trump’s selection for key cabinet positions’
Chief US economist Stephen Gallagher and his team says: “Markets are swooning from uncertainty: S&P500 short-term risk is down to 1950 (first chart resistance), VIX could reach 25%-30% level and stay there for a while, but light net long positions on the US equity index prior to the election do not argue for more.
“The odds of a December rate hike have fallen appreciably, a support to global risk assets. The Fed is caught between the data (favourable) and the Markets/Trump which are uncertain.
“Next to watch is Trump’s selection for key cabinet positions. These choices may be calming or may invoke more concern.
“The inauguration day is 20 January. A discussion of tax cuts should be a priority. The economic benefits of that may be felt by late 2017, but not earlier. Tax cuts could be a more immediate benefit. Protectionist trade policies are likely to be less substantial but will stretch over a longer period of time, and are obviously bad for EM assets for now – with the notable exception of China onshore assets and Russia.”
Citi: ‘Taking a cue from the Brexit vote is helpful’
Head of Global Macro Strategy Jeremy Hale says: “A Trump win, plus a Republican House and Senate, all appear likely. Near term we expect yields to fall, equities and EM 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 risk.
“Thereafter, watch for signs of fiscal stimulus which could change things. See note for details. GMS portfolio: We entered the US election long duration, short SPX but also long EM FX. We modify our portfolio as follows: New trades — Convert long UST 10y into 10y receiver swaptions, take profits in long MXN Option, hard stop long ZAR, cover short in silver Hold existing positions — SPX put spread, long gold, long EUR/USD, receive CNY 5y, long protection China CDS.”
Meanwhile, chief US equity strategist Tobias Levkovich says: “To some degree, taking a cue from the Brexit vote is helpful. The initial reaction was a selloff, then a period of reassessment, and then a rebound. Sentiment in the market is already quite awful, and it is unlikely that any major business spending plans were forthcoming before the election such that many get deferred or canceled.”