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President-elect Trump

Hold your horses

What a difference a few days can make. Faced with the prospect of a Trump presidency, markets have quickly gotten over their initial surprise. Let’s look at a couple of indicators, compared to last Tuesday’s close (i.e. just a few hours before results came in):

  • The S&P 500 Index is up 1.2%. The sector rotation within the S&P 500 Index has been more noticeable. While the defensive income sectors, staples and utilities, lost about 4% and 6%, respectively, cyclical sectors such as financials and industrials are up 10% and 6%.

  • For the most part, it is a similar story in equity markets outside the United States. The main exceptions are some emerging markets, notably in Latin America.

  • The Mexican peso is down 11% against the U.S. dollar. Most developed-market currencies, notably the euro, have also weakened against the U.S. dollar. (The range is roughly -0.5% to -3.5%, if you leave out the British pound, which is up slightly.)

  • Meanwhile, yields on 10-year U.S. Treasuries are up almost 40 basis points, putting upward pressure on yields in other countries, too. This reflects growing hopes of a sizeable fiscal stimulus from higher infrastructure spending and lower taxes (which could boost U.S. economic growth in the short term, as well as inflation and interest rates in the longer term).

The takeaway? Markets have clearly started to price in an end to gridlock. For now, concerns over a protectionist tilt under the new administration have receded into the background. President-elect Trump has helped matters, by taking a measured tune and appointing party-insider Reince Priebus, Chairman of the Republican National Committee, as his chief of staff.

We are currently re-examining our assumptions as we head into 2017, in the light of the U.S. elections. In the meantime, we would remind investors that many of the uncertainties we previously highlighted remain, notably on the course of monetary policy.

Last week, we argued against taking too gloomy a view on the outlook under a Trump presidency. In the light of recent market movements we would also caution against exuberance in coming weeks. As we previously pointed out, presidential transitions are time-consuming affairs. Events intervene and any fiscal stimulus is unlikely to have much of an impact before the end of 2017, even if enacted unusually quickly by Washington standards. Add Mr. Trump’s limited background on the nuts-and-bolts of governing and there remains plenty of scope for political surprises, triggering renewed market volatility.

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