U.S. Markets To Collapse Amid Trump Election Surprise

 | Nov 09, 2016 07:05AM ET

Forex News and Events

The American election reached its epilogue very early this morning, even though Trump’s victory was widely unexpected by financial markets, with polls largely anticipating a Clinton victory. It is the second time this year that pollsters got it wrong after the Brexit vote.

Financial markets hardly priced in a Trump possibility and this is why, over the late hours of the night, each announcement of a Trump advantage created major turmoil in the markets. During the ballot counts, the peso lost 5% against the greenback. Global stocks are also declining, in particular Japanese stocks which declined 5%. Gold and silver have been the biggest winners of the elections result thus far.

The Trump election will very likely have an impact on Fed monetary policy. Further downside moves in the markets are likely to happen within the next few weeks as markets start to price in Trump’s first moves.

The Fed is now front and centre until the end of the year, with markets now pricing a December rate hike likelihood of 51.2% as a collapsing stock market would likely prevent the US central bank from normalizing monetary policy. However, Trump will only start his presidency in January and the Fed will still have their hands free until then despite multiple statements from the new US president. For us it is an eventuality that Donald Trump will try to diminish the Fed control. Volatility will remain high for some time.

Market reaction: panic move is over

The market’s reaction to Trump’s victory was similar to the aftermath of the Brexit vote. Investors sold-off risky assets to buy safe haven ones. However, just like any panic reaction, markets quickly bounced back with EUR/USD returning to 1.1060 after hitting 1.13 in the early European session. Even the Mexican peso, which fell as much as 13%, started to recover. Nevertheless, we expect selling pressures on the peso to remain elevated as it is still very uncertain whether Trump will actually act on all his campaign promises, especially those regarding Mexico and the renegotiation of international treaties.

Only a couple of equity markets were extending gains this morning. This includes the Swiss and Russian equity markets. The former has been bolstered by a recovery in pharmaceutical companies which came under heavy selling pressure last week as the markets priced in a Clinton victory. Novartis (NYSE:NVS) is up 4.30%, Roche (OTC:RHHBY) surged 4.15%, while Galenica (SIX:GALN) was up 4.60%. The SPI hit 8,563.05, up 0.83% on the session. Russian equities were better bid on the prospect of an improvement in US/Russia relations under a Trump presidency. The MICEX index was up 1.62%.

EUR/USD - Volatility Spikes.