by Eli Wright
The U.S. election may have come and gone, but market volatility could linger. Too many questions surrounding President-elect Donald Trump's platform, staffing and 'bold' campaign promises still need to be answered.
Perhaps the most immediate market impact will be felt in the Pacific Rim, where hopes for the TPP free-trade agreement have been dashed. As Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics said, “it's fair to say that TPP is now in the dustbin of history.”
Even though Japan is the US’s fourth-largest trade partner, markets do not appear overly concerned. Overnight, the Nikkei is up 1.71%, to 17,672.62. The Hang Seng dipped 1.39% lower, to 22,217; the Shanghai Composite rose 0.45%, to 3,210.31. China, with the second-largest global economy, was not an original TPP member. They're currently pushing their own regional agreement.
This morning, Europe opened higher: the FTSE 100 is currently up 1.06% at 6,802; the DAX is up 0.87%, currently trading at 10,760.25. The Stoxx 50 is up 0.96% to 3,048.
In the United States, markets closed the week with a relief rally; the Dow reached a record high of 18,855 gaining 5.4%, its largest weekly improvement in almost five years, eventually closing at 18,847.66; the S&P 500 and NASDAQ both advanced 3.8%, closing at 2,164.45 and 5,237.11, respectively. As of this writing NASDAQ, S&P and Dow futures are all slightly up in pre-market trading, 0.35%, 0.38% and 0.53% respectively.
The post-election bump in risk appetite continued, driving investors away from safe-haven bonds. The 10-year Treasury yield is currently over 2%, while 30-year yields are over 3%. Speculation about Trump’s proposed fiscal policies, including lowering taxes, increasing US protectionism and boosting infrastructure spending by $1 trillion have buoyed inflation projections, contributing to the higher bond yields. However, until Trump takes office at the end of January, nothing is certain, and the extent of his actions— whether drastic or otherwise—remain anyone's guess. Markets continue to price in the probability of a Fed interest rate hike, which would likely also enhance bond yields.
Forex
Confidence in a December rate hike, combined with looser fiscal policy expectations under Trump, pushed the US dollar higher against a basket of currencies. There is little reason to expect this trend to change, and the Dollar Index, currently at 99.81 should be able to reach its early November level of 100.21.
The euro, yen, and Swiss franc all declined against the dollar, as did the Canadian and Australian dollars. Sterling was one of the strongest of the majors, closing the week on a three-day rally.
The Mexican peso has continued to bleed, falling to $0.0477 versus the USD. Mexico's Central Bank is expected to hike rates on Thursday, November 17, in order to lift the overnight rate from 4.75% to 5.25%. Analysts however believe the rate hike might have more to do with rising Mexican inflation than with stabilizing the country's currency.
Commodities
A stronger U.S. dollar usually weighs on gold, and coupled with renewed enthusiasm for risk, gold tumbled, slipping from $1,300 to $1,225.85. Expectations for the precious metal might need to be significantly downgraded for 2017. Looking at the monthly chart, it's still trading within a $1,200-$1,400 range, so both support and resistance levels haven't yet been tested.
Oil production continues to rise. The ongoing supply glut is driving prices down. Brent is currently trading at $44.60 while Crude has dropped to $43.23.
Trump’s campaign promise to ramp up US industry and manufacturing has helped push copper past its $2.30 resistance level for the year. The metal briefly climbed to $2.70, breaking down-channel resistance. Unless it remains bearish, copper's next major pressure-point is $2.90. Copper is currently trading at $2.545.
Iron ore, another potential beneficiary of Trump's stated infrastructure focus, also jumped on election results—it's now up 7.3% to $73.35.
Stocks
The biggest sector gainers since Trump’s election have been Industrials, Financials and Biotechs. Not surprisingly, traders see these three as the biggest potential winners under a Trump regime, given campaign promises he made to invest in industry and infrastructure and roll back banking regulations. Additionally, Big Pharma prospects have improved since the Democrat's tough stance on drug pricing is no longer a factor.
The S&P 500 advanced 3.78% over the last five trading days. In comparison, healthcare and biotech stocks are up 5.81% while industrials gained 8% and financials jumped 11.31%.
Source: Fidelity
Over the same period, Tech companies have lagged S&P performance by 2.4%, diverging at a rate last seen when the internet bubble burst. Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB), Google (NASDAQ:GOOGL), and Netflix (NASDAQ:NFLX) have all experienced losses.
The high tech and internet industries as a group donated 114 times more to Clinton’s campaign than to Trump’s and some analysts fear backlash. The possibility also exists that restrictive overseas trade policies could negatively impact the bottom lines for these companies. Nevertheless, it's equally conceivable that this is merely a temporary dip and uncertainty on how Trump will treat Information Technology is driving traders to safer bets with better odds.