Trump’s Victory: Politics Takes Center Stage in Global Markets

Move over central bankers. Donald Trump’s victory puts the focus back on politicians

By Richard Barley

Markets have proved once again that they just don’t get politics. Donald Trump’s victory in the U.S. presidential election is rocking bonds, stocks, currencies and commodities. While monetary policy has driven markets to dizzy heights, politics seems likely to be the bigger influence from here.

As after June’s Brexit vote, the knee-jerk market reaction was to flee from risky assets and seek safety. The yen and euro rose against the dollar, stocks fell sharply, government bonds and gold rallied. All of that is to be expected: it is the typical hard-wired reaction to a shock. The Mexican peso, the poster boy for the risk of a Trump victory, fell more than 10% against the dollar before recovering a little.

The reversal is all the more painful because markets once again followed the same path as Brexit: faced with close polling, investors believed that Hillary Clinton would prevail, preserving the status quo, and risk appetite had improved in the first two days of this week.

But there are key differences: Brexit wasn't, in the end, a global event, while Mr. Trump’s victory is. There are market wrinkles too. One of the most interesting is in the U.S. Treasury yield curve. Short-dated yields fell as expected, as markets revised their thinking about the likelihood of a December rate increase from the Federal Reserve.

But moves in longer-dated Treasurys were mixed: by London’s morning, 10-year yields were only 0.01 percentage point lower, a tiny move, and 30-year yields were actually 0.09 point higher. The steeper yield curve suggests concerns about the fiscal and inflationary consequences of Mr. Trump’s potential policies, including higher deficits, sacrosanct entitlement spending and changes at the Fed.

While one form of uncertainty has been resolved by the election, another form of uncertainty has risen that is potentially far more difficult for investors to evaluate. A win for Mrs. Clinton would have represented greater continuity; Mr. Trump’s victory brings many more questions about what his actual policies will be. Foreign, trade and fiscal policy will be in particular focus, but the quantum of the changes is impossible to assess in the near term.

For markets that have spent much of the past few years hanging on the every word of central bankers, this has major consequences. Investors have now had two enormous wake-up calls in 2016 about the changing political landscape after the global financial crisis. Political risk often gets tacked onto the list of worries investors have as a catchall. Now those risks are all-encompassing.

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