Daily Market Reports | Nov 10 2016
By Greg Peel
The Dow closed up 256 points or 1.4% while the S&P rose 1.4% to 2169 and the Nasdaq gained 1.2%.
Wrong on both counts
The polls said Clinton would win and the market set itself for such an outcome. The polls were wrong. The assumption was a Trump victory would send global stock markets into a death spiral. Ultimately, that assumption was wrong.
That assumption certainly looked to be accurate early in the afternoon Sydney time, when the ASX200 was down 200 points, the Dow futures were down 800 points, and the S&P and Nasdaq futures were “limit down” and thus suspended. Gold was up sixty dollars and the US ten-year yield was down 14 basis points at 1.72%.
There had been little disagreement a Trump victory would prompt a sell-off in stocks. But there was also general agreement the sell-off would be knee-jerk and not sustained, and that eventually there would be a recovery. Many traders were looking forward to an opportunity to pick up cheap stocks.
Unless they were up in the wee smalls of Wednesday morning US time, they have already missed out. Bolder players in the Australian market had the opportunity to jump in in normal trading hours yesterday as the US stock futures began to turn. The ASX200 still finished down 100 points, but as the bell rang, US futures were still on a recovery path.
Perhaps Brexit taught us two things: don’t trust the polls, and don’t hesitate too long to exploit the sell-off.
There’s no point in discussing who the winners and losers were on the Australian stock market yesterday. The SPI Overnight closed up 157 points this morning.
Wild Reallocation
Wall Street hit a new high before curbing its excitement but it has not been a market-wide rally. Various stocks and sectors moved sharply in either direction last night as traders played on the various policy themes emerging during Trump’s presidential campaign.
The Republicans have won the triple crown. They control the upper house, the lower house and the White House. They have an unrestrained mandate. The gridlock years of the Obama presidency are over.
US industrial stocks surged last night (infrastructure spending, lower tax, cutting red tape), the banks surged (repeal regulations, bond rate surge), drug companies surged (no pricing investigation), hospital stocks plummeted (repeal Obamacare), Big Tech companies, such as your Apples, Amazons and Microsofts, fell (bring taxes back to the US)… the list goes on. A week ago Wall Street was praying for administrative gridlock – Democrat in the White House if needs be but Republicans controlling Congress – and last night they were championing a new horizon of unencumbered economic growth potential.
The US ten-year bond yield has swung from being down 14 basis points at 1.72% to being up 21 basis points at 2.07%. The great bond sell-off Wall Street has been anticipating for years has occurred in a heartbeat. The initial move was a typical safe haven trade, matching a US$60 jump in the gold price to around US$1335/oz. Gold is now back where it started.
The sell-off in bonds likely reflects an assumption economic growth can return to the US, as well as divestment to buy stocks. Interestingly, the assumption was that of Trump were to win, the Fed would not be hiking in December. But that assumption was predicated on the other assumption that right now the Dow would be down a thousand points, not hitting a new all-time high.
Mind you, Trump has won on a policy of cutting taxes (reducing government revenue) and increasing spending (on infrastructure in particular). If, indeed, his supply-side approach does lead to strong growth and increased revenue as a result, it will not happen overnight. In between the US debt burden can only blow out further. Sell bonds.
So what does the Fed do now? The bond market had already set for a 25bps rate hike in December and has now added another 21 bps. The sky has not fallen in, so the Fed does not have the excuse it had with Brexit to wait and watch. And given Trump was highly critical of the Fed in general and Yellen in particular during the campaign, will Yellen even hang around?
Does the assumed rate hike mean anything anymore, now the world has changed completely?
Commodities
Over 24 hours, gold is down US$4.50 at US$1272.10/oz.
Increased US infrastructure spending is music to the ears of commodity producers. Copper rose 3.5% in London, nickel 2.5%, and aluminium 1.5%.
Iron ore has leapt US$3.20 or almost 5% to US$71.00/t, a price last seen in 2014.
West Texas crude is up US32c at US$45.18/bbl.
The US dollar index is 0.7% at 98.51 and the Aussie is down 1.5% at US$0.7653. I’m not sure this is the way Philip Lowe wanted to see the currency retreat. At the height of the fear, the Aussie was trading under US76c.
Today
Today opens to a new world. The SPI Overnight closed up 157 points or 3%.
The RBNZ has just cut its cash rate, citing political upheaval in the US as one factor, albeit the cut was widely forecast before yesterday.
Locally, housing finance data are due today and a raft of AGMs will be held.
Leicester City, Brexit, Footscray, Cronulla, the Chicago Cubs, Trump. When, exactly, did we shift into a parallel universe?
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