Economics

One week on: how the market changed its tune on Trump

These five charts illustrate how the market’s attitude has softened towards Donald Trump’s win, but how long will it last?

18 November 2016

David Brett

David Brett

Investment Writer

Bond markets under pressure, the US dollar strengthening, turbulence in emerging markets and rising inflation expectations – is it all the result of Donald Trump wining the US election?

These five charts offer a snapshot of how markets have reacted in the week following the conclusion of the presidential race.

Bonds

What is happening?

Yields on bonds have risen sharply since Trump’s election win was announced. Expectations are that his policies will lead to a rise in inflation, which in turn increases the need for higher interest rates.

When this happens, investors sell bonds because they expect inflation to eat more quickly into today’s fixed income, and they expect to get better income elsewhere once rates rise. When bond prices fall, yields rise – hence the patterns seen in the past week.

The chart below shows where investors expect the yield on five-year US Treasury bonds to be in five years' time.

Why is it happening?

Trump has said that he will embark on a massive spending spree to rebuild infrastructure in the US and put people back to work. That increases the likelihood of wage rises and higher spending, which creates inflationary pressure (prices go up as demand meets supply).

Trump has also said he will begin to loosen fiscal policy, such as cut taxes, that have kept growth and interest rates low. If fiscal policy is loosened and inflation rises the Federal Reserve (Fed) will have room to raise interest rates further.

Emerging markets

What is happening?

The recent fall in emerging markets has echoes of the “taper tantrum” of 2013. This was when emerging market asset prices fell because talk of tapering, a steady slowing of the quantitative easing programme in the US. We explain the reason for this below.

Are emerging market assets now experiencing a “Trump tantrum”? The chart below shows a sharp sell-off in emerging market equities.

Why is it happening?

Emerging market economies rely heavily on external financing. That means a lot of government and corporate debt is borrowed in dollars. If interest rates rise then so will the yield on the debt owed making repayments more expensive. This can stifle growth and hit company profits.

There is also the prospect that unfriendly trade policies could reduce investment in emerging market economies.

The problem for markets is that Donald Trump’s policies are unclear at this stage.

Iron ore

What is happening?

The price of iron ore is at the highest level in nearly two years.

Why is it happening?

Trump’s proposed infrastructure building programme will bolster demand for raw materials, although a rally was already firmly underway due to moderated supply from major miners and increased Chinese infrastructure investment.

However, the rally may have been overdone. Prices fell sharply on Wednesday.

The dollar

What is happening?

The value of the US dollar is rising sharply. Aside from being a blow to American exporters and foreign visitors, it holds ramifications for much in the world, as touched upon above. For instance, it naturally exports inflation. Buyers of petrol in Europe, for example, see price rises at the pump because oil is priced in dollars.

The chart below illustrates the sharp rise in the dollar following the result of the election.

Why is it happening?

Rising inflation expectations potentially give the Fed room to raise rates. Interest rates are to currencies what dividends are to stocks – the higher the dividend, the more enticing an asset is to investors looking for income (cash return on investments).

Gold

What is happening?

The price of gold has fallen sharply despite an initial spike in the build up to and immediately following the election. It inititally rose to $1,277 from $1,267 but a week after the election it had fallen to $1,224.

Why is it happening?

Gold is perceived as hedge against both inflation and economic uncertainty. Its limited supply makes it a store of value in the eyes of investors. The price soared in the 1970s and after the global financial crisis of 2008, for example.

This helps explain the price volatility seen since last week with markets undecided about the economic outlook. Nerves have been calmed following the election with investors adopting a “wait and see” approach.

Gold is priced in dollars and when the dollar rises, it makes gold more expensive to buy. This hampers demand and the price, all else being equal, will fall.

Another factor to consider is that higher rates can be negative for gold, which doesn’t provide an income.

A view from Geoff Blanning, Head of Commodities:

"Gold is more than a safe haven, throughout history it has always been a great store of wealth," said Blanning.

"Since Trump won the election, the gold price has actually gone down. But its long term prospects should be extremely sound. Wait and see in the short term, but potentially a real opportunity in the medium to long term.

"All the factors are in place to see much higher inflation. Trump could be the catalyst to set it off. If we see high inflation then commodities like gold could be a good way to protect oneself."

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