PHOTO
Financial markets are witnessing major ripples in the wake of Donald Trump’s election as 47th President of the US. The US markets are reacting positively, and oil and gold are taking a hit due to a surging dollar, while Bitcoin hits a record high.
Though investors do not yet have a clear view of how the markets will react in the immediate future, they are likely to take note of the historical performance of equities when Congress is divided between the parties.
“Historical performance shows that under an all-Republican Congress, the S&P 500 recorded an average year-on-year rise of 13.4%. This is often attributed to a more stable political environment, favouring pro-business policies,” John Plassard, Senior Investment Specialist at wealth management firm Mirabaud, said.
A Trump victory could have a slightly positive impact on economic growth in the short term, but this effect could be quickly cancelled out by imported inflation and tensions over monetary policy, he said.
Zawya breaks down what a Trump 2.0 presidency means for investors in the Middle East:
Impact on portfolio growth
UBS Chief Investment Officer for Global Emerging Markets Michael Bollinger warned that short-term gains following a Trump win could play out different in the medium term.
“A Trump win is perhaps positive for stocks initially, because the risk of regulation on the financial side gets priced out. The risk of tax increases will get priced out. So that’s going to be a positive for earnings expectations,” said Bollinger. “But at the same time, it won’t last for long when the market will start to think very carefully about its potential impact on portfolio growth.”
Stock markets in the GCC rose in early trade on Wednesday following Trump’s victory. While Saudi Arabia’s benchmark index TASI gained 0.9%, Dubai’s DFM gained 0.5%.
Bollinger said a balanced portfolio is key, and GCC investors should consider high-grade bonds and diversify into international portfolios to protect their wealth against medium-term risk.
Select hedges, including exposure to gold and oil, can be used to further protect local assets, he added.
Bond markets
The bond market, in contrast, is selling off sharply, with 10-year Treasury yields approaching 4.50%, said the Franklin Templeton Institute.
“Bond investors are reacting to the probability that tax cuts will not be accompanied by significant spending restraint. The bond market also anticipates stronger growth and possibly higher inflation. That combination could slow or even halt anticipated Fed rate cuts,” they said.
With a Trump victory and a Republican control, yields could have further upside, especially if post-election stimulus take shape in early-2025, added Swiss bank UBP.
“While election results dominate investor attention, the upcoming Fed meeting starting today should not be overlooked. This event could introduce two-way volatility in the near-term into bond markets not only related to the 50 bps in rate cuts still expected by markets through year-end, but also surrounding the prospect of an end to quantitative tightening,” UBP said.
“Moreover, with the National People’s Congress Standing Committee meetings ongoing this week, the risk of China stimulus adding an additional catalyst to global as well as US bond yields compounds the challenges facing bond investors.”
Replicating the 2016 post-election rally, S&P futures rose by 1.3% overnight. As higher bond yields to begin to bite for equities, equity investors should similarly focus on risk management amidst elevated valuations and optimistic earnings expectations moving into 2025, said UBP.
Futures
According to Franklin Templeton Institute, US equity futures markets are responding favourably to a Trump presidency.
“US equity futures have risen over 1%, with a larger gain from the broader Russell 2000 futures index. The biggest winners will be sectors and industries welcoming a more business-friendly regulatory environment, including fossil fuel energy companies, financial services, and smaller capitalisation companies. Fears of caps on prescription drug prices will recede, boosting the fortunes of the pharma sector,” said the institute.
Dollar gains
The US dollar has surged, boosted by the combination of higher US bond yields and the anticipation of strong inflows into US public and private equity markets.
“US yields have traded sharply higher, and the dollar has gained, especially against the Mexican Peso and Japanese Yen. Attention will quickly turn to the Federal Reserve’s rate setting meeting on Thursday. Another 0.25% cut to the base rate is priced in, but Fed Chair Jerome Powell will be pressed for a reaction to a Trump regime and foreseeing the implication on interest rates into next year,” said Neal Keane, Head of Global Sales Trading at ADSS.
Crude prices
The impact of a strengthening dollar and an unexpected rise in US crude inventories also resulted in a decline in oil futures on Wednesday, following two days of gains.
Projections of Trump’s victory in the US presidential election led to an increase in the dollar and weighed on oil prices.
“While Trump’s return could lead to tighter sanctions on Iranian oil, offering short-term support, his focus on ramping up domestic oil production could weigh on global oil demand over the longer term, especially as trade tensions with China might intensify, further pressuring demand,” said Terence Hove Financial Markets Strategist Consultant to online trading platform Exness.
Data from the American Petroleum Institute revealed a larger-than-expected rise in US crude inventories, suggesting lower demand. These factors combine to create a bearish near-term outlook for global crude prices, as the stronger dollar and growing stockpiles suggest a possible slowdown in demand, Hove added.
Gold
Gold prices dropped from 2740 to 2701 dollar per oz after reaching a record high in late October as it faces a strengthening dollar.
“With the greenback continuing its upward momentum, gold could face downside risks over the near-term,” said Bas Kooijman is the CEO and Asset Manager of DHF Capital S.A. “Despite gold trading lower in the early European session, a confirmed Trump win could potentially drive-up demand for the metal, particularly amid potential political and economic instability.”
Crypto investments
Bitcoin reached record highs of $75,000 as traders bet on a Trump victory.
“Trump trades have been all the rage - crypto has been on fire, with Bitcoin hitting a record high, with huge USD buying interest playing out, with the USD index at one stage rising by the most since March 2020, driven by EURUSD breaking to 1.0719 and USDJPY into 154, with even greater percentage changes in the higher beta plus – MXN, PLN, ZAR, and AUD,” said Chris Weston Head of Research at trading brokerage Pepperstone.
With a pro-crypto administration this brings $100k Bitcoin into play through the year end and Q1 of 2025.
US Economy
A Republican sweep both houses of Congress and the White House will result in markets expecting a more “high-octane US economy”, with growth above potential and inflation above the Federal Reserve’s target, according to Samy Chaar, Chief Economist and CIO Switzerland, Lombard Odier.
Interest rates are then likely to be higher than pre-election expectations, with the question of tariffs key for global trade and the Fed’s easing prospects.
“This has major implications for financial markets. The macroeconomic fundamentals remain a tailwind for investments. We see high-yield credit and gold performing well. Global equities, including US stocks, also have potential to rise in the next 12 months, as earnings expand, and margins remain high,” said Chaar. “In the US market, financials, tech and defense should perform well under a Trump administration.”
However, Trump’s reduction in taxation and increased military spending could significantly increase sovereign debt, providing headwinds in the US treasury markets as investors grow weary of ballooning national debt.
(Writing by Bindu Rai, editing by Seban Scaria)
