Daniel Byrne

A ten-year industry veteran and trader who has worked with both retail and institutional clients in several major Australian brokerage firms. Daniel has used his first-hand experience with institutional traders to custom build a trading methodology based on their principles. He is also current office holder with the Australian Technical Analysts Association in Sydney. easyMarkets is proud to have Daniel lead our Australian efforts as Managing Director in Australasia.

From the desk of Rob Francis, easyMarkets.

The global financial markets are still buzzing after the surprise election of Donald Trump to the US presidency. The GOP candidate, who ran a decidedly anti-establishment campaign, easily swept to power on November 8 in an uncontested election that saw many former blue states turn red. Several weeks later, investors are still puzzling about what a Trump presidency will mean for the markets.

Trump campaigned successfully on the slogan “Make America Great Again.” These words had a clear economic message: rebuild the nation’s infrastructure, lower regulation and reduce taxes. The message wasn’t lost on investors, who became surprisingly upbeat after Trump’s election win, leading to a surge in global stock markets. On Wall Street, the Dow Jones Industrial Average set multiple record highs, while the other major stock indexes reversed post-Labour Day losses. Financials were by far the strongest performers, a clear sign that deregulation and lower taxes were expected to boost profitability for America’s largest banks.

The healthcare sector also outperformed, as Trump’s victory meant a divisive Hillary Clinton wouldn’t have the opportunity to rein in prescription drug costs.

A positive response from stock investors was somewhat surprising, given the market’s strong preference for Hillary Clinton, the so-called establishment candidate who was supposed to represent stability and a continuation of President Barack Obama’s economic policies. While investors could certainly change their opinion on Trump, there’s no question the first two weeks after his election played out much differently than what many had expected. For example, Citigroup predicted a 5% plunge in the S&P 500 if Trump prevailed.[1] The large-cap index not only avoided a selloff, it closed within striking distance of its all-time high a week-and-a-half after the election.

However, Trump’s election isn’t without its challenges. It has quickly pushed the US dollar to its highest level in 14 years,[2] which could make it difficult for American multinationals to stay profitable. Emerging markets have also been hammered on the prospect of growing American protectionism and isolationism.[3]

The election of an anti-establishment populist leader also raises questions about a material shift in trade policy, which could impact every nation involved in bilateral trade with the world’s largest economy. Trump successfully convinced Americans they were on the losing end of trade deals. He vowed to revisit the North American Free Trade Agreement (NAFTA), hold China accountable for its so-called shady business dealings and scrap the Trans-Pacific Partnership (TPP), a 12-nation pact that includes Australia and several other Pacific Rim nations.

A more isolationist America could lead to retaliation overseas. Countries may choose to revisit their existing trade deals and pivot away from the US market. China’s continued yuan devaluation is seen by many as a backdoor attempt to strengthen its trade position. Based on the GOP candidate’s campaign rhetoric, sectors tied to US infrastructure, biotechnology, pharmaceuticals, banks and even basic materials are likely to be the best performers for the foreseeable future.

The Trump effect also propelled copper prices to their best performance in 30 years on the prospect of massive infrastructure spending. According to analysts, Trump’s $500 billion infrastructure plan could add 10% to global demand for copper. Iron ore, a commodity used to make steel, also had its best week since 2008 following Trump’s election victory.[4] These valuations clearly suggest that industrial commodities might be on every investor’s radar in the Trump era.

The fate of precious metals is less certain. After an initial spike, gold and silver plunged in the wake of the November 8 election, largely a result of a surging US dollar. The outlook on precious metals might depend at least partially on risk sentiment. Trump’s election win is expected to open the door to other populist leaders across Europe.

According to experts, the biggest potential change resulting from a Trump presidency is monetary policy. A massive stimulus package could lead the Federal Reserve to act more aggressively to curb inflation. This would lead to a significant paradigm shift from the current environment, which is characterized by highly accommodative monetary policy.[5] Higher interest rates may act as another catalyst for the US dollar, which is already thriving on expectations for a December rate hike.

A stronger dollar has wreaked havoc on the global currency markets, sending the yen and Canadian loonie to nine-month lows. The euro has also declined nearly 5% against the dollar since the election, reaching its lowest level in almost one year. The Australian dollar has suffered a similar fate, falling 5% since the November 8 election, which is equivalent to about 400 pips in forex terms.

Interestingly, the US election had no direct impact on crude oil, as investors continued to weigh the likelihood of a production cut from the Organization of the Petroleum Exporting Countries (OPEC). Oversupply conditions that have defined the global energy markets for more than two years could intensify under Donald Trump, who supports traditional fossil fuel industries. Trump made it clear on the campaign trail that he would consider halting oil exports from the Middle East if elected president. Saudi Arabia recently issued a warning to the President-elect that blocking imports from the kingdom would be a bad idea.[6]

By banning oil imports and stimulating domestic shale production, Trump could lead to a widening of the global supply-demand imbalance. This might trigger an even longer slump for oil, which is already tipped to remain lower throughout 2017. OPEC and other major producers will fight aggressively to maintain market share in the event the world’s second-largest energy consumer closes its doors to foreign oil. reference

Wall Street, the US dollar and base metals were the immediate victors following Trump’s election victory. Precious metals, emerging markets and other major currencies were the clear losers. These divergences might be expected to continue for the rest of the year, and may be likely be exacerbated by higher US interest rates.

Investors eager to reshape their portfolios in the election aftermath might avoid moving too hastily. That’s because elections usually trigger extreme volatility in the stock, bond, currency and commodity markets. Investors might therefore await further clarity on the president-elect’s policy platform. Trump’s first 100 days in office might be critical for investors looking to piece together the next four years. Until then, the details remain piecemeal and elusive.

Looking even further into the future, the main question investors should be asking is whether the GOP candidate will trigger a shift toward de-globalization. Many economists worry that such a trend would lead to higher prices, rising unemployment and dismal economic growth throughout much of the world.[7] In the case of the United States, higher deficits resulting from lower taxes might also have adverse effects on investors and the health of the economy in general.

The election of Donald Trump followed Britain’s shocking decision to leave the European Union (EU). Both movements represent a global shift toward populism, which is likely to be the wave of the future. These events precede a major referendum on constitutional reform in Italy, which many argue could pave the way for the Five Star Movement, the leading populist opposition vowing to bring the question of Eurozone membership to the people.[8] Populist movements are strong in France and Germany, two countries that will head to the polls next year.

Therefore, investors  might view Trump’s election in the broader context of a populist wave sweeping the advanced industrialized world. Each movement  might lead to major overhauls in the global political order. These forces might have a direct impact on the global financial markets.

[1] Mark P. Cussen (November 7, 2016). “A Trump Win Would Dump 5% Off S&P 500: Citi.” Investopedia.

[2] Sam Bourgi (November 19, 2016). “95% Chance of December Rate-Hike Lifts US Dollar to 14-Year High.” Economic Calendar.

[3] Moyagabo Maake (November 17, 2016). “A Trump-proof investment strategy.” Financial Mail.

[4] Jon Yeomans (November 11, 2016). “Trump effect propels copper to its best week in 30 years.” The Telegraph.

[5] Robin Wigglesworth (November 18, 2016). “Markets trumpet new Trump era, but details remain elusive.” Financial Times.

[6] Matt Egan (November 16, 2016). “Saudi Arabia warns Trump against banning oil imports.” NN.

[7] Moyagabo Maake (November 17, 2016). “A Trump-proof investment strategy.” Financial Mail.

[8] Reiss Smith (September 21, 2016). “What is the Five Star Movement? Meet ‘Italy’s Ukip’.” Express UK.

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