#Market Strategy — 10.11.2016

Impact Of The Trump Victory

Roger Keller

The appearance of Mr Trump in a presidential role has reassured the financial markets. Downside risks are limited.

  • Following the first speech by Donald Trump as the 45th US President, investors focused on the positives of Keynesian measures rather than on protectionism risks.

  • Our 3-month targets on government bond yields have been marginally revised up.

  • No changes to the outlook for Fed rate hikes or for the US dollar.

  • For equities, in the short term, volatility is much more probable than a correction.

A rapid reversal

The financial markets’ initial negative reaction to the prospect of a Trump presidency was progressively reversed when Mr Trump gave his first speech as the 45th President of the United States of America. He appeared in a completely different light, abandoning the posture of a candidate, behaving like a president and sounding conciliatory with democrats. It also helped that Hillary Clinton asked her supporters to give Mr Trump a “chance to lead”. The financial markets came to the conclusion that it was best to focus on the probable policies rather than all the possible scenarios. This meant focusing on fiscal stimulus rather than the consequences of trade protectionism.

As a result, bond yields rose significantly, with the 10-year Treasury yield easily surpassing the 2% barrier, while the US dollar finished the day on a much stronger note and equity markets closed in very positive territory (except in Japan, which today caught up with the rest of the world).

Short-term outlook for the financial markets

It now appears that short-term downside risks have greatly diminished. As a result:

  • We stick to our expectations of a Fed rate hike in December, followed by a further two in 2017 and two more in 2018;
  • Our target for the 10-year Treasury yield in three months has been upgraded from 1.80% to 2%, in line with our 12-month target; for the 10-year Bund, the short-term target has been revised up from 0.10% to 0.20% (12-month unchanged at 0.40%);
  • We remain comfortable with our 3- and 12- month EUR/USD target of 1.08;
  • Equity markets are now much more likely to see volatility than substantial setbacks. Their primary trend remains positive.

Medium-term outlook broadly unchanged

Marginal adjustments to the upside for US growth and to the downside for emerging markets could be made in the coming weeks. They will not change the relative attraction of the different asset classes. Within each of the asset classes we do not envisage any modifications.