14 novembre 2016

Trump’s election outcome: financial discrimination of assets

Donald Trump’s election participates in a wave of anti-establishment, anti-globalization and nationalists platforms which roiled worldwide democracies since the financial crisis of 2008. It results from both physical and economic insecurity. In response, worldwide citizens demand more Government authority, less economic openness and more protection.

It is not by chance that the best performing currency since the election of Trump is the GBP (see figure 2). It seems that the election of Trump represents a continuity of the Brexit referendum. From that perspective, UK is not perceived anymore as the black sheep in Europe but instead as the sheepdog that every country in Europe might follow. In the wake of the Trump election, the European Union project is weakened, nationalist and populist parties may be boosted (National Front in France, Party for Freedom in the Netherlands, AfD in Germany and M5S in Italy). The present political fragility of the euro zone is illustrated by widening spread between Germany and Italy (figure 13).

Trump is a major unknown to financial markets. Meanwhile, the more consensual approach of Trump since his election has helped stabilize markets. Financial markets have started to anticipate the fiscal stimulus plan that Trump gets ready to undertake. The rebuilding of US infrastructure is clearly reflationary and this plan has been welcomed by the Federal Reserve. As a result, interest rates have jumped 45 bps in the US where most of the rise involves an increase in inflation breakeven rate (figure 3). Most of sovereign bonds are presently rated negative by Riskelia’s Radar after being one of the most prominent bet from the start of 2016 (figure 4). As a matter of fact, the revival of long term inflation expectations puts the Federal Reserve hike on December 14th 2016 on the table (figure 7).

For the time being, the rise in interest rates has not reflected adversely on liquidity as illustrated by a Risk Aversion settling in risk seeking territory (figure 5). The more striking impact of the Trump’s election is the contrast between risky assets:

  • Emerging assets dropped sharply following the tumble of emerging currencies vs. the dollar (figures 2 and 6). As a matter of fact, Mexican Peso dropped 12% while Brazilian Real and South African fell 7% since Trump was elected US President.
  • The dollar rise (+2.3% vs. the euro, +2.6% vs. the yen) benefitted to Japanese and euro zone equities. As a matter of fact, the Germany DAX 30 and Japan Nikkei 225 dominate other scores in the equities space (figure 8 )
  • Commodities fell overall. Meanwhile, Industrial Metals were boosted by the prospect of Trump’s infrastructure plan whereas Energy markets suffer from the lack of OPEC countries’ determination to decrease supply (figure 9). The rise in US rates weighed on Gold and Precious Metals.
  • Last but not least, the equities sectors’ performance was divergent as illustrated in figures 10 and 11. Financial was boosted by the rise in interest rates and the prospect of financial deregulation. In parallel, European Basic Resources and US S&P Materials were supported by the looming US infrastructure investment plan. As a result, the Value sector led the Growth Sector while low volatility stocks were highly affected by the rise in interest rates (figure 12). Moreover, US Small Caps clearly outperform US Large Cap which currently benefit from the globalization trend.

It is too early to say if all these moves will lead to long lasting trends. Meanwhile, should the reflationary theme be confirmed (the current weakness of commodities poses a question), it would involve a major catch up of value stocks to the detriment of growth, quality and defensive stocks.

Figure 1: Currencies move within G10 countries since the election of Donald Trump.

Figure 2: Currencies move within major countries since the election of Donald Trump.


Figure 3: Evolution of US 10 years nominal rate, real rate and breakeven rate in 2016.

Figure 4: Riskelia’s Radar on Sovereign Bonds.

Figure 5: Riskelia’s Risk Aversion Indicator.

Figure 6: Evolution of emerging assets since 2016.

Figure 7: Long term inflation expectations reflected in the Inflation Swap Forward 5 years / 5 years.

Figure 8: Riskelia’s Radar on Global Developed Equities.

Figure 9: Evolution of Commodities Index (Total Return) since 2016.

Figure 10: Evolution of S&P 500 Sectors Performance since Trump’s election.

Figure 11: Evolution of Europe Stoxx 600 Sectors Performance since Trump’s election.

Figure 12: Evolution of US Equities Investment Style in 2016.