The bank for a changing world

Shifts in focus : 7 days of Economics

  • William De Vijlder
  • Paris
  • 10.11.2016
  1. Two-step market reaction to US elections: first flight to safe havens, thenimproved sentiment
  2. The president-elect’s communication and the composition of his cabinet are now the focus

Financial markets are discounting mechanisms : price changes reflect changing expectations. As it became increasingly likely during the Asian session on 9 November that Donald Trump would be the next president of the US, the market reaction was swift and significant. 

Equities and equity futures were down significantly, the dollar weakened against the euro, US treasury yields and German Bund yields declined, some Eurozone spreads widened, the Mexican peso saw a big drop, commodities weakened but gold rallied. In summary, investors switched to ‘risk off’ mode: risky assets suffered and safe havens rallied. The reaction reflected the surprise element (investors were positioned for a Clinton victory) and an increase in uncertainty. 

Subsequently things calmed down: equities recovered, the dollar strengthened, bond yields rose. This change of direction suggests that investorswere quick to shift focus on the medium term implications of the elections. The rise in US Treasury yields to levels well above those of the previous day reflects the view that there could very well be some degree of fiscal expansion, that this could impact the stance of Fed policy and that this warrants a higher risk premium. 

Anticipations change of course on the back of new information, implying a particular focus on the president-elect’s communication and the composition of his team.

Read more