In the short term, we see significant volatility in all markets, and a flight to traditional safe havens as people look to park excess liquidity in gold, CHF and JPY. Hard currency bond yields should also tighten and equity markets will see some sharp declines, mostly as a function of the fact that a Trump win was not evidently priced into yesterday’s market close and traders will be shocked.
However, our suspicion is that plenty of traders will view any material decline in equities as a buying opportunity, and that immediate falls may well reverse over the coming weeks. This short term reaction will principally be driven by uncertainty and fear rather than by a sober review of the impact of Trump’s policies. In common with other safe haven currencies, we would expect the Dollar to appreciate against EM FX in the short term, although we see the prospect of a US rate rise in December having receded with this result, and consequently the Dollar weakening as and if it becomes clear to what extent Trump intends to pursue some of the more isolationist trade policies he has advocated during the election.
Trump’s win certainly raises questions about America's willingness to continue to act as the architect of global free trade, and in the absence of American leadership and advocacy of global liberal values, leaves the prospect of a vacuum with no country with the credibility to fill the shoes of the US.
Mexico is perhaps most vulnerable to a migration of capital from its economy and to a continued collapse in the value of the peso, and whether the wall is physical or virtual, the Trump administration is likely to look to bring some of Mexico’s existing trade surplus with the US back onshore. In addition, the major Trans-Pacific Partnership trade deal is likely to be scrapped, the US will probably seek the renegotiation of NAFTA, and whilst we would not expect tariffs to be imposed in the immediate short term, the nature of the trading relationship with China and other major exporters is going to be reviewed.
Andrew Newington is partner and COO at Actis and chairs the firm's 'Macro Forum'