Equity Markets

Let's begin by taking a look several stock market trends that developed after investors got over the initial Trump victory shock.

1. Global markets (especially in Asia) plunged on heightened uncertainty, some of which was related to Trump's views on international trade. But as cooler heads prevailed (and as traders remembered Brexit), risk appetite returned. Here are the Nikkei 225 futures.

2. VIX futures in the US came back to the level where they started before the election results began coming in. 
 

3. Investors all of a sudden realized that the Trump White House and the Republican-controlled Congress could deliver significant benefits to several corporate sectors and to the stock market as a whole. Here are some of them.

• The Trump administration may be able to push through a dividend and/or a capital gains tax cut. As a result, despite higher interest rates (more on this shortly), high-dividend shares jumped.

• During much of his campaign Trump has been promising to help US small/medium-size businesses - mostly by reducing government red tape. Small cap shares outperformed sharply on Wednesday. 

• Easing financial regulation - something that a Republican-controlled Congress will certainly attempt to push through - could be quite helpful for US bank shares. The chart below shows that banks are now outperforming the S&P500 on a year-to-date basis.

Here is Morgan Stanley, for example.

• With Hillary Clinton's threat to impose price controls on pharmaceuticals out of the way, the pharma sector rose sharply. The second chart below shows the Nasdaq Biotech index ETF.

 

• And then there was the promise of a massive infrastructure boost in the US. Funding it will be another matter, but it certainly got investors' attention.

Source: Bloomberg.com; Read full article

US (and Chinese) copper prices rose sharply in response to the $500bn figure, sending mining shares surging.

 

Caterpillar jumped 8% - the government will need a great deal of equipment to build that "beautiful wall."

• Of course Trump's victory was a negative for some sectors, for example firms that do a great deal of business with Mexico. Some food companies could be especially impacted. Here is the relative performance of Kellog as well as Kraft Heinz.

 

This hit to food producers pushed the US Consumer Staples Index lower.

• US growth companies' underperformance relative to value shares worsened in the wake of the elections.

4. This election was also a victory for the legalization of cannabis in a number of states.

Source: @WSJ; Read full article

Source: @business, @Tmp_Research; Read full article

Several cannabis-focused firms saw a bump in share price. Here is Canopy Growth Corporation. 

The legalization movement even impacted shares of Scotts Miracle-Gro.

Rates

As bond investors contemplated the impact of Trump victory it must have occurred to some that Trump's protectionism and threats of tariffs will mean higher import prices and therefore a pickup in inflation. As the equity markets began rallying, bonds went up for sale.

1. The 30yr Treasury yield shot up by over 20bp - a price drop of nearly 5%.

The Treasury curve steepened.

2. Short-term rates recovered from steep declines on Tuesday night, preserving the December rate hike expectations. Here are the January 2017 Fed Funds futures. 

3. US inflation expectations had the largest one-day jump in years, with the 5yr, 5yr forward breakeven rate blasting past the 2% Fed target. 

4. With rates rising in the US, the dollar recovered from Tuesday night's lows.

Commodities

1. Trump's $500bn infrastructure spending promise added fuel to China's commodities rally. Iron ore and aluminum futures are shown below.

 

2. Separately, US drilling permits seem to have bottomed, following oil rig count.

Source: Goldman Sachs, @joshdigga

Emerging Markets

1. Mexico felt the brunt of Trump's victory as the nation's CDS spreads widened and bond yields surged.

 

2. It looks like the following development in Iran could be Trump's first major international challenge.

3. Russian shares rallied on Trump's victory as investors expect the new administration to be more "constructive" on the sanctions situation.

4. Ukrainian yields rose, with investors reasoning that a Russia-friendly US administration is probably not a great outcome for Ukraine. 

5. The Turkish lira hit a new record low. The second chart below shows a Turkish equity ETF (denominated in dollars). 

 

6. The Malaysian ringgit which tends to be the bellwether for emerging market currencies remains under pressure. 

7. Philippine shares did not react well to the US elections outcome. 

8. The Egyptian pound seems to have found a floor - for now. 

9. Venezuelan market's unprecedented spike (up 15 days in a row) could be indicating that Maduro is on his way out.

10. Turning to India, we had the following letter to the editor today.

Modi announced that Indian Rs 500 and 1000 Rs notes will become invalid immediately, can still be deposited into banks but not used for trade anymore. It is an attempt to reduce the volume of "black" money in the market, curb counterfeits and reduce housing prices among other things. New Rs 500 and 2000 notes will gradually be introduced. In the next few weeks, there will be limits on daily/weekly rupee withdrawals from the bank.

This will have a major immediate effect on the middle-class economy of India and all those who have been hoarding and paying with black money - housing prices likely to drop, Indian rupee likely to strengthen? 

Regards,
Petra

Indeed, this development (see story) will generate significantly more liquidity in the financial system, driving down borrowing costs. At the same time, the government will be able to collect more taxes, improving its fiscal situation. India's government bonds rallied (yields fell) on the news.

11. The renminbi continues to drift lower vs. the dollar. Below is the 1-month USD/CNY FX forward rate. Once again, this trend is likely to boost domestic speculative demand for metals.

Separately, here is the breakdown of China's exports to the US and emerging markets (EM), showing EM Asia figure continuing to grow.

Source: Natixis, @joshdigga

Asia

1. Elsewhere in Asia, the combination of domestic political uncertainty and a protectionist government in the US is not helping the South Korean won. Here is the one-month USD/KRW FX forward rate.

Source: Bloomberg

2. Japanese outward direct investment hit a record recently. 

Source: Goldman Sachs, @joshdigga

3. New Zealand's central bank cut key interest rate and suggested that the easing cycle is probably over. 

The United Kingdom

UK's trade deficit was worse than expected (note that foreign products now cost more in GBP terms).

The United States

US inventory-to-sales ratio is off the highs but remains elevated.

The great inventory unwind continues, creating a drag on the GDP. The inventory trimming is particularly visible in the durable goods numbers (second chart below).

 

Global Developments

The chart below shows the number of free trade agreements signed per year as globalization stalls.

Source: Deutsche Bank, @joshdigga

Credit

Here are the high-yield default rates over the past few years in the US and Europe. The second chart shows the breakdown between US bond and loan default rates.

Source: Moody’s Investors Service

This chart shows the Moody's forecast for default rates by sector over the next year.

Source: Moody’s Investors Service

Food for Thought

1. Let's begin today's Food for Thought^™ with the Global Political Freedom Index. Could we see a dip like we had in the 1920s?

Source: Deutsche Bank, @joshdigga

2. The explosion of available apps for mobile devices.

Source: @SensorTower, @StatistaCharts, @Tmp_Research; Read full article

3. Election-related stories by media source. 

Source: @NewsWhip:, @michaelbarthel, @Tmp_Research; Read full article

4. How would other countries vote in the US election?

Source: @ECONdailycharts, @Tmp_Research; Read full article

5. These are the US counties that flipped from Democrat to Republican in this election. 

Source: @washingtonpost, @Tmp_Research; Read full article

Finally, the shift to the left vs. to the right in yesterday's election (relative to 2012).

Source: @nytgraphics, @nytimes, @paul1kirby, @Tmp_Research; Read full article