AP
Donald Trump.
As it became clear that Trump would take the White House, stock futures crashed, the Mexican peso plummeted, and safe havens like the Japanese yen and gold soared.
The shock quickly passed, with markets returning to normal in just a few hours. US and European stocks ended the day higher, and things seemed pretty calm. However, as might be expected, lots of questions about what Trump's unprecedented victory means for the markets.
Thankfully, under the guidance of chief US economist Kevin Logan, a bunch of strategists and analysts at HSBC have rounded up the questions their clients are asking them most frequently in the first few days after the election. The top questions span from how the Fed reacts to the victory, all the way to how gold will react to Trump as president, and provide a useful insight into what the markets are thinking about right now
We've pulled out the eight most interesting responses below:
1. How will the Fed react?
Answer: Prior to Trump's election, Janet Yellen and the FOMC were widely expected to increase rates at the Fed's December meeting. That doesn't change in HSBC's view, as Trump's election is unlikely to have an instant impact on the economy. "As long as markets are relatively stable, particularly for risk assets, policymakers are likely to go ahead with a December hike, in our view."
2. Are US Treasuries a buy?
Answer: "Yes, in the longer run. However, investors are focused on Trump's tax and spending plans which would increase expected supply, putting upward pressure on yields."
3. How will the USD be affected by the Trump victory?
Answer: HSBC describes the victory as a "major event" for the forex markets, adding: "Initially we see further MXN and EM FX selling versus the USD while EUR, JPY, CHF and gold would likely rally further. The degree of the impact on the USD hinges on whether Trump delivers on the bulk of his campaign promises."
4. What fiscal loosening measures do you expect from Trump in the next 12 months?
Answer: As with all its answers, HSBC's response to this question is highly caveated, but Kevin Logan suggests that Trump is set to bring in "a reduction in the business tax rate from 35% to 15%, along with a one-time 10% tax rate on the repatriation of accumulated untaxed profits of foreign subsidiaries of US companies." He is also expected to spend heavily on the military and infrastructure, necessitating a suspension of the US' debt ceiling.
5. What are the main global economic implications?
Answer: Global demand could get a positive shock thanks to "the prospect of looser fiscal policy ... but, if it leads to a less accommodative Fed, could curb the ability of emerging economies to cut rates further. Protectionism is a bigger and more immediate threat." Chief global economist Janet Henry adds that markets might start caring more about political risks than they previously have done.
6. Are equities being too complacent?
Answer: In a word, yes. "We do not see this benign reaction lasting. Donald Trump's victory is likely to lead to a prolonged period of policy uncertainty, which is already at unprecedented levels globally. This uncertainty comes against a backdrop of elevated valuation multiples, optimistic earnings growth expectations, and investor sentiment that is far from being bearish."
7. What are the implications for EM FX, especially MXN and RMB?
Answer: In short, high volatility. "Political uncertainty is heightened and this means EM currencies will likely exhibit greater volatility," writes HSBC's Paul Mackel. "Markets will now be hyper-sensitive to comments from the newly elected US president."
8. Can gold break above recent highs?
Answer: Gold prices will increase, but they're not going to come anywhere near to the levels reached in the financial crisis. Chief Precious Metals analyst James Steel notes that Trump's expansionary fiscal stance will be good for gold, saying:
"Trump's fiscal policies are also gold-friendly. Higher deficit spending is associated with higher gold prices. There may also be a geopolitical risk element to a Trump presidency that favors gold, as he has announced he would review decades-old US political and military alliances."