Bond markets and the dollar remain key this week

Traders continue to react to the victory of Donald Trump in the US Presidential Election. We look at how this seismic event has shifted expectations and sentiment across financial markets. It would appear that the bond markets and the dollar are leading the key moves and other markets continue to react this week. This report also looks at the technical outlook on forex, equities and commodities as traders look to dramatically re-position themselves for an outlook that took them by so much of a surprise.

bonds

Early on Wednesday morning as Donald Trump was romping towards an unlikely victory in the race to the White House, markets were fearful. Fearful for the dollar, for equities and a flight into safe havens. However, this all flipped around during Trump’s acceptance speech as he talked about a his vision for a massive stimulus program. Markets turned quickly with Treasury yields soaring higher being the key move. If this spending defines his presidency, Trump will drive growth through Keynesian-style fiscal spending of maybe $1 trillion. This drastic shift against the austerity the world has seen amidst the de-leveraging since the 2008 financial crisis. This has huge market implications. Treasury yields are jumping as traders expect higher growth and inflation. “Trumpflation” is now a factor to drive markets. Also, the Fed monetary policy has previously been shackled by low inflation expectations, but this now opens the way for a steeper tightening by the Fed. With steeper yield curves, banking stocks have jumped, however the flip-side is the prospect of another Emerging Markets tightening “tantrum”. Increasing inflation expectations and a tighter Fed is likely to put safe havens such as the Japanese yen and gold under pressure again. Initial market reaction has given Trump the thumbs up, but notably we know nothing of prospective anti-trade, isolationist policies yet. Markets could give growth expectations a very different perspective.

 


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