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Trump Bump Drives Global 'Risk On' Trade

Trump Bump Drives Global 'Risk On' Trade

2016-11-10 13:40:00
James Stanley, Currency Strategist
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Talking Points:

- The dust has settled from U.S. Presidential Elections but price action continues to burst higher in many global equity indices. To read more about what is driving this: Trump Reflation Trade Fueling US Yields, US Dollar Rally

- Bond yields are putting in brisk moves higher as the global reflation trade is getting priced-in. While the initial price action around the election was similar to Brexit, the follow-thru response has been markedly different.

-If you’re looking for trading ideas, check out our Trading Guides.

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Yesterday saw quite the reversal across capital markets. And while the initial throes of price action around U.S. Presidential Elections came-in very familiar to what we saw around the Brexit referendum, the follow-thru response was markedly more ebullient. The major reversals around the election started at Midnight Eastern Time; so still well-ahead of any official metrics that Mr. Trump would win, but deep enough into the night where it was known to be considerably likely.

As of our writing yesterday, the U.S. Dollar had clawed back most of its losses from the early portion of election night, showing a Doji on the daily chart. But the bulls didn’t stop there – price action continued to drive higher, and that’s lasted throughout the Asian session as the U.S. Dollar has driven back towards 9-month highs.

Trump Bump Drives Global 'Risk On' Trade

Chart prepared by James Stanley

But this post-election move hasn’t been relegated to just currencies. Stocks are rushing higher as well, and the reversals in equity markets began around the same time as what was seen in currencies, and these runs higher have continued throughout the Asian and then the European trading sessions. On the chart below, we’re looking at the S&P 500 as price action has driven up to fresh two-month highs.

Trump Bump Drives Global 'Risk On' Trade

Chart prepared by James Stanley

This rally hasn’t been isolated to just U.S. markets or just U.S. assets. We’re seeing stocks around the world shoot higher as well. Below we’re looking at the Nikkei, and below that we take a look at the CAC40 out of France.

Trump Bump Drives Global 'Risk On' Trade

Chart prepared by James Stanley

The CAC40 saw a strong technical bounce off of a key Fibonacci level at the 4280-vicinity.

Trump Bump Drives Global 'Risk On' Trade

Chart prepared by James Stanley

Why Are Stocks Rallying, and How Long Might This Continue?

While much of the western media appeared to be at least somewhat convinced that the world would come to an abrupt end should Donald Trump win the presidency, the reality of the matter is that it’s the Federal Reserve that’s been driving price action across markets, and this is a factor that is unlikely to change based upon who is holding the office of the Presidency. The past eight years have seen global markets go berserk while producing historically relevant moves, yet for much of the world the topic of ‘economics’ remains a pain-point. This is at least partially behind the global drive towards populism, and this drive isn’t over yet as attention will quickly be cast to French and then German elections next year.

But while many voters are angry, the politicians that they’re electing out of office have been relying on Central Banks to keep markets afloat since the Financial Collapse and, again, this is a factor that is unlikely to change based solely on political leadership. Brexit was a great example of this. Brexit happened, much of the world freaked out for a couple of days, and then cooler heads prevailed, realizing that while the world might be ‘changing,’ Central Banks were likely going to be there to support markets just as they have over the prior eight years. In short order the BoE had come to the table with rate cuts and stimulus, and the FTSE was at a new all-time high just two months after the Brexit vote.

Could this change? Sure – but what we’ve been trying over the past eight years hasn’t worked in the opinions of many voters, so maybe some new ideas could bring some better results. Many of these ‘risk on’ moves really hastened around the time of Donald Trump’s victory speech, in which he struck a very conciliatory tone in pledging to represent all Americans, and gave a stern nod towards plans for big boosts in fiscal spending in a drive towards ‘economic renewal.’

This really speaks to the core of the problem regarding stimulus. For the past 8 years, nearly all stimulus efforts in the United States have been driven from the Federal Reserve via monetary stimulus. This is basically giving money to banks in hopes that they lend it out to, in-turn, reinvigorate the economy. This hasn’t worked. Banks have hoarded cash, invested it at low rates, and this has further driven down interest rates as all this fresh capital is keeping demand and prices high (and yields low).

The reason this didn’t take place via fiscal stimulus was Washington gridlock. With a Republican Congress and a Democrat President, little was agreed upon and even less was accomplished. But now that we’ll have a Republican President with big plans for fiscal spending along with a Republican Congress – markets can hold out hope that fiscal spending, similar to what was seen under Ronald Reagan, can re-invigorate the American and, in-turn the global economy.

When Hank Paulson, then Treasury Secretary, announced the Troubled Asset Relief Program during the Financial Collapse, with tears in his eyes he said that he was only doing this (public bailouts for private companies) so that Congress could get its fiscal house in order. It was supposed to be a stopgap to stem the bleeding from the Financial Collapse. But that stopgap became relied upon when Congress couldn’t get their ‘fiscal house in order’ and this led to a heavy reliance on monetary stimulus that saw three rounds of QE and over Four Trillion Dollars added to the Federal Reserve’s balance sheet (enough to pay off every student loan in the United States, three times over). This is an untenable long-term solution and, frankly, in the opinion of many voters all of this work has been for naught as jobs have still continued to leave their communities.

Now, regardless of how much any person or group of people might dislike the President-elect, there is hope that this can finally happen, and that is what is currently driving price action. Can this change - Absolutely. But given the trials and tribulations seen over the past 8 years of ZIRP, a new approach can bring much-needed hope into the picture.

So, to put it simply, from an economics perspective the same near-term ‘positives’ from a Clinton-scenario are present in a Trump-scenario (the Fed will continue to ‘manage’ the economy); but the Trump-scenario also presents the prospect of positive change on the fiscal front, with an eventual removal of reliance on monetary stimulus. And if that doesn’t work, the Fed is still on the sidelines ready to ‘save the day,’ just as they have for the past eight years.

As we wrote in the Q4 Trading Forecast for Equity Markets: This is a buy-the-dip type of scenario until Central Bank dovishness turns, and it doesn’t appear as though we’re there yet. (For the full Q4 Forecast, please click here).

--- Written by James Stanley, Analyst for DailyFX.com

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