Uncertainty after US election wipes $30bn from stockmarket

Financial markets were stunned by Donald Trump’s US election victory and Republican clean sweep of congress yesterday.

Donald Trump’s shock US election victory has stunned markets.

Global financial markets were stunned by Donald Trump’s US presidential election victory and Republican clean sweep of congress yesterday, wiping $30 billion off the Australian sharemarket in a Brexit-like scramble to buy safe havens and reduce exposure to riskier assets.

Australia’s benchmark S&P/ASX 200 share index fell 1.9 per cent to 5156.6 points amid a wave of uncertainty over the economic effects of Mr Trump’s policies.

At one stage the index was down almost 4 per cent at a four-month low of 5052.1 as Mr Trump’s victory became clear, before it clawed back some gains later in the session. The losses have translated to the Australian market being down 2.6 per cent so far this year, while traders have seen swings of this magnitude only three times in the past decade.

Trading yesterday in the US S&P 500 index futures was temporarily suspended after a 5 per cent fall triggered automatic circuit breakers, but the key US share index futures later pared their fall to be down 1.8 per cent. Last night traders in Europe had absorbed the surprise win, with London’s benchmark FTSE 100 index down 0.6 per cent.

Gold spiked to a five-week high of $US1337 an ounce before falling back to $US1300, and US 10-year Treasury bond yields briefly hit a four-week low of 1.71 per cent.

The Mexican peso bore the brunt of investor anxiety over Mr Trump’s policies, falling as much as 12 per cent against the US dollar. The Australian dollar hit a two-week low of US75.8c.

Investors were awaiting clarity on some of Mr Trump’s more extreme policies around trade and his stance on US Federal Reserve chief Janet Yellen, whom he previously threatened to sack. Overall the mood among analysts was pessimistic despite a rise in cash holdings in recent months.

“It’s risk off for us,” said Robert Rennie, Westpac’s global head of market strategy. “A Trump presidency has seismic implications for global trade, geopolitics and the US economy.”

In his view, markets would trade on a “heavy risk-averse footing for some days, if not weeks, and the Australian dollar could fall below US74c as markets position for “severe clashes over trade between the US and Australia’s key Asian trading partners”.

Westpac chief economist Bill Evans said the initial focus of markets would be on Mr Trump’s trade policies, which were “unambiguously negative”, and said fears about the direct impact on China of Mr Trump’s trade policies should not be overstated.

“Once markets have sufficient information to assess the likely extent and damage of these trade policies, they will focus on the likely significant fiscal policy changes and whether such radical changes will get the support of the fiscally conservative Republican House and Senate,” Mr Evans said.

Mr Evans said the impact of global uncertainty on markets as well as business and consumer confidence was a much more specific issue for Australia, and until the new president set out the specifics of his agenda, business and consumer confidence was likely to falter in Australia.

In his view, relations between the US and China hold the greatest risks for the global economy because China’s development in recent decades has been a boon for the global economy on many fronts, including the efficient production of manufactured goods, which has helped keep developed world inflation contained, the greater availability of financial capital, as foreign exchange recycled into developed world markets, and for commodity demand.

“Consequent gains for incomes in China have also seen the ongoing rise of its middle class, which has then brought further benefits for the global economy via increased services trade and financial integration,” Mr Evans added.

“Persistent diplomatic tensions between the US and China would put these drivers of global growth at risk, with potential losses not only limited to the US economy. Obviously, Australia is materially exposed to developments both in resources and services demand.”

While financial markets have long believed the US Federal ­Reserve has been positioning for a rate rise at its December meeting, the uncertainty that a Trump presidency could exert over the US and global economies meant that the Fed will now hold fire until it can more accurately assess the likely growth profile for the US economy, according to Mr Evans.

The market-implied chance of a US interest rate increase next month plunged from 75 per cent to 35 per cent after the election, Citi’s head of investor sales Mark Woodruff said.

ANZ economists drew parallels between the Trump-induced sell-off in markets and the sharp fall that followed Britain’s “Brexit” vote to leave the EU.

“But unlike Brexit, we are unlikely to see a sharp recovery in markets this time, as uncertainty over policies under a Trump administration is set to linger for a while,” ANZ head of Asia research Khoon Goh said.

“Political uncertainty in Asia is set to rise, and the risk of further capital outflows in the near term will put further pressure on Asian currencies,” Mr Goh said.

According to HSBC, a “risk-off” reaction to Mr Trump’s victory is “likely to be sizeable and to persist for some time as the market scrambles to digest what would be a surprising and game-changing result”.

“The medium-term implications will hinge on the actual scale and nature of policy implementation,” HSBC’s global head of FX research David Bloom said. “Fiscal expansion and new legislation to encourage or force repatriation of overseas profits would likely be positive for the US dollar.

“However, a weaker US dollar may be part of Trump’s efforts to spur manufacturing; a tougher immigration policy could curtail potential growth, while a squeeze on real incomes from higher tariffs could tip the economy towards ­recession. This, combined with a US isolationist stance, would likely encourage foreigners to sell US ­assets.”

But Capital Economics chief economist Paul Dales was less pessimistic about Mr Trump, noting that history showed that the global economy and financial markets were usually fairly resilient to political events as long as they were not accompanied by recession or financial crisis.

“Although the uncertainty associated with president Trump may last a little longer, we still suspect the markets will shrug it off before long as the US and global economies continue to perform reasonably well,” Mr Dales said.