Markets have had strong reactions to the results of the US elections. Although votes are still being counted, Trump Wins as the de facto winner of the contest, with former and now president-elect Donald Trump set to secure both the Electoral College and the popular vote.
Congressional elections were also held, but vote counting is slower. Republicans have so far secured flipping the Senate, with at least 51 Senators. The House, on the other hand, is still well in play, with some political analysts suggesting that there remains a possibility that Democrats could secure a majority there. If that were the case, that could throw some additional uncertainty and ambiguity into the results.
The Market Reaction
US stocks greeted the news with cheer, as a future Trump presidency is expected to support business and keep taxes from rising. Futures of the benchmark S&P 500 rose to over 2.0% as it became increasingly clear who the winner would be. Small cap stocks are expected to be especially boosted, with the Russell 200 rising over 5.5% in the futures market.
Trump’s expected plans to impose tariffs have had multiple impacts on the currency markets. The dollar rose with higher yields as markets priced in fewer rate cuts by the Fed. Tariffs are seen as inflationary, and a faster growing economy would also keep consumer prices rising faster. Combined, the Fed is now projected to cut rates at a slower rate over the course of the next year.
Global Impacts
The stronger dollar immediately set off alarms for Japan, as the USDJPY gained two big handles, rising to the highest it has been since July. Markets started pricing in more rate increases from the BOJ as a necessity to keep pace with a higher rate environment, and as a necessity to keep the currency from weakening even further. Traders could continue to test the possibility of revitalizing the carry trade, with an eye on whether Japanese authorities will intervene to bring the exchange rate down.
The Euro was also another casualty of the rate implications of a Trump victory. A potential trade war would likely weigh on the shared economy, forcing the ECB to cut at a faster rate than currently projected. This left the Euro weakening, also against the pound as Britain is likely better positioned to secure favorable trade deals with a Trump administration.
Where Do Things Go Now
Commodity currencies were also affected, with WTI crude prices falling to test the $70/bbl level before bouncing back on expectations of increased production. The higher rates in the US weighed on gold, as well as the potential for less geopolitical risk. Copper, the energy transition metal, was also on the backfoot as China might be facing increased trade pressures from a Republican White House.
The next issue is determining control of the House of Representatives. If Republicans retain the majority, then it would be easier to secure spending packages and implement many of Trump’s agenda items. If Democrats manage to control the House, it could raise concerns about the fiscal cliff at the end of the year, as there would need to be negotiations between the two parties on lifting the debt ceiling. That could return some uncertainty to the markets and reverse some of the moves seen on Wednesday. However, Democrat control of the House wouldn’t impede a Trump administration’s moves on tariffs.
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