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Categorized | Equities

Traders grapple with Brexit déjà vu as Trump triumphs


Posted on November 9, 2016

Over pizza late on Tuesday night, traders at Chicago’s Traditum Group watched as a succession of US states defied pollsters and pundits. Markets initially reacted to the prospect of a Donald Trump presidency with near-panic, but by the next day most had settled into a nervous calm.

Mike Creadon, Traditum chief executive, stayed up all night in his office in the Chicago Board of Trade’s venerable art deco skyscraper, and said the worst of the rout ended after reports that Hillary Clinton had conceded, and Mr Trump gave what was an “extremely conciliatory” victory speech. “Those two things were really very powerful,” he said. “That’s when markets really turned around.”

US equity futures had at one point slumped so severely they triggered trading curbs designed to quell sharp moves in times of panic. But by midday on Wednesday in New York the S&P 500 was up 0.4 per cent as investors adjusted to the political earthquake that had shook the US and singled out potential winners and losers in its wake, despite the sense of unease.

“There’s a lot of uncertainty now, we don’t know what a Trump presidency will look like,” said John Linehan, portfolio manager of TRowe Price’s equity income fund. “The market is clearly interpolating that Trump will govern differently than he ran.”

Investors must now contemplate a White House occupied by a Republican who has rewritten political orthodoxy and a Congress run by party compatriots who must decide how to respond to a leader many of them recently shunned.

Prospects for industries and economies in longstanding allies and trading partners are in flux, reflecting antitrade rhetoric from a president-elect who has questioned the basis of the postwar international order.

The choppy market movements reflected a sharp change in expectations after days of growing confidence that Mrs Clinton was set for victory. Buoyed by experimental voter projections, the sentiment was captured by pollster Frank Luntz — widely followed by money managers — who at 6.43pm New York time tweeted: “Hillary Clinton will be the next president of the United States.”

But as it became clear Florida had gone to Mr Trump, fear set in. The Australian stock market — one of the few to be open as early states declared — gave up initial gains to drop 1.9 per cent. As other Asian exchanges followed suit, automatic trading curbs in US equity futures kicked in as the S&P 500 e-mini contract slid as much as 5 per cent.

At 9.41pm came another tweet from Mr Luntz: “I am being inundated by hedge fund managers. They are worried about the markets.” Later on, he said: “All of tonight’s exit polls were wrong, and I was wrong for citing them.”

Japan’s benchmark Topix took a 5.4 per cent tumble for the exporter-heavy Nikkei 225. As more states declared for Trump, brokers even revived concerns about the so-called US defence umbrella, guarantor of Japan’s security for 70 years.

Shares in Tokyo Keiki, which makes military compasses, weapons maker Ishikawa Seisakusho and rifle group Howa Machinery all leapt in expectation that Japan’s defence budget must now rise. Hosoya Pyro-Engineering, Japan’s biggest producer of flare bombs, ended 23 per cent higher.

Once Europe woke up, screens turned red there too as stock markets followed Asia’s lead. Losses were moderated as the day progressed, however, following a pattern set in the wake of the UK’s Brexit vote, when markets first swooned but then recovered strongly.

“It proves populism is alive and well in the developed world, but the main lesson that investors learnt from the Brexit vote is that details are crucial,” said David Zahn, head of European fixed income at Franklin Templeton. “Investors do not yet know what Mr Trump will focus on first. Will it be trade or tax cuts or infrastructure spending? They want to know how his ideas will be executed before they decide how to react.”

When the US markets also defied expectations and opened cautiously higher, it reinforced the sense of nervous calm descending on markets.

The two biggest winners in US equities on Wednesday were healthcare and financial stocks. The former have had the threat of tighter regulation by a Clinton presidency lifted, while the latter were buoyed by a “steepening” of bond market yields, a boon to banks that have struggled with low interest rates.

Still, some fund managers warned that despite the uneasy calm, more turbulence was a near-certainty. “The reaction was subdued because of bottom-fishing, but I don’t think we have seen the last of volatility,” said Krishna Memani, chief investment officer of OppenheimerFunds. “Markets want to be optimistic, but if the data changes that may change too.”

At the same time, questions about the $14tn market for US government debt will go unanswered until a candidate who has attacked the head of the Federal Reserve and raised the possibility of renegotiating American obligations demonstrates whether he will govern in January in the same manner as he campaigned in November.

For instance, the yield on the benchmark 10-year Treasury at one point tumbled to a low of 1.71 per cent as investors dived for safety. Yet by midday in New York yields had rocketed to over 2 per cent for the first time since January, highlighting the conflicting impulses from a president who has promised tax cuts and higher spending that could ignite inflation.

Mr Trump’s triumph also raised questions over the US central bank’s policy. Frits Vogels, head of European broking ICAPcap in London, said: “What people are going to care about is what it’s going to do to the Fed … people have been preparing themselves for an interest rate rise all year and more next year.”

Yet it is now questionable whether the central bank will risk tightening monetary policy with investor nerves on edge. “We are in an era of populism which is playing havoc with normal assumptions,” said Matt Peron, head of equities at Northern Trust.

Additional reporting by Gregory Meyer, Leo Lewis, Philip Stafford, Elaine Moore, Roger Blitz and Nicole Bullock