Donald Trump's rollercoaster impact

November 2016

As the US election results unfolded global markets nosedived, then rebounded, writes Heather Jacobs.

Globally, investors are bracing for volatility as Republican presidential candidate Donald Trump shocked the world by his election to the 45th presidency of the United States.

Late-polling predicted Democrat candidate Hillary Clinton would win. As vote counting continued on November 11, she was winning the popular vote, gaining 47.7 per cent compared to Trump’s 47.4 per cent, however Trump has so far secured 290 electoral votes against 232 for Clinton. He needed 270 to win. Clinton conceded defeat at 2am New York time on Wednesday.

ANZ Research economists, in a note released on the afternoon of November 11, wrote that it was hard to predict “what a Republican administration looks like in detail”. They pointed out trade and economic confidence as two key factors likely to impact Australia following the news.

Trump’s expected trade policies, such as a proposed big tariff hike on China, could negatively impact the Sino economy and other emerging economies in Asia. “This would have a negative impact on the Australian economy given that half of Australia’s exports are directed to emerging markets in Asia,” wrote ANZ’s economists

The immediate and possible future impact on markets is where uncertainly comes in.

The question of confidence

Global markets took a nosedive when it looked like Trump was going to win. However, they rebounded sharply as he gave his victory speech.

“Investors have brushed aside the shock of the Trump victory in the US election and equities have surged higher,” stated ANZ Research in a note on the morning of November 10. “However, with many of his policy measures still unknown, volatility is expected to be high in the coming days.”

“The social contract between mainstream politics and the electorate has been broken, and status quo policies will not re-establish it,” wrote ANZ economists. “More restrictive attitudes to trade policy could be negative for global growth, but it’s the direction of microeconomic policy settings – all the small stuff – that will take on heightened relevance over the coming years.”

On Wednesday, November 9, the local sharemarket’s lead index, the ASX/S&P 200, dropped more than $30 billion in value, closing down 1.9 per cent.

Markets in Asia also fell sharply on Wednesday, led by Japan’s Nikkei, which was down 5.4 per cent at closing time. Currency moves were also extreme – particularly for the Mexican peso – while gold (often seen as a safe investment) surged.

“It was a classic large risk-off move as the US election results starting trickling out yesterday afternoon and evening, but markets were calmed by an acceptance speech by president-elect Trump that was less aggressive than feared,” said ANZ Research.

In Donald Trump’s victory speech, America’s next president rallied his constituents to “come together as one united people” as they “embark upon a project of national growth and renewal”.

“We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals,” he said. “We’re going to rebuild our infrastructure, which will become, by the way, second to none. And we will put millions of our people to work as we rebuild it.”

He also promised that he’s got a great economic plan: “We will double our growth and have the strongest economy anywhere in the world.”

In response, equities bounced back strongly when market opened the next day, with America’s S&P 500 closing 1.1 per cent up for the day.

Nasdaq was up by 1.1 per cent and US 10-year bond yields also finished Wednesday significantly higher (above 2 per cent). This is the first time they’ve been above 2 per cent since January 2016.

“The move is likely to drive investors to reconsider positions and for borrowers to look to hedge interest rate risk,” stated ANZ economists.

They also noted on the afternoon of November 11 that volatile markets could have a longer term detrimental impact.

“More broadly, financial market volatility may signal weak economic times ahead and weigh on household and business sentiment. If businesses feel less confident about the economic outlook, they may delay their investment and hiring decisions, while consumers may delay spending and look to increase savings.”

Trump’s impact on the Australian dollar

The US election result is expected to have a lasting and negative impact on the Australian dollar, according to Daniel Been, head of foreign exchange research at ANZ.

He says the wait is on to see how and if Trump’s campaign policies become the policies of his new administration. He compares the initial negative reaction to Trump’s election to the immediate impact of Brexit on world markets.

“…and with the campaign over, this period of calm could persist in the near-term … However, over the medium term, if enacted, Trump’s more protectionist stance on global trade and his preference for looser fiscal policy and a smaller role for monetary policy should be supportive of the USD [US dollar] – particularly against small open economies like Australia.”

Longer-term, the outlook for the Australian dollar will likely become more clouded and the downside risks greater.

“We know little about Trump – he does not have an extensive political record and has not steered towards any particular ideology during his campaign,” says Been. “What we did learn during his campaign was that he has a much less compromising style in geopolitical diplomacy relative to that of the Obama administration and a more protectionist slant to global trade policy. If these traits follow him into the White House, then it is likely to be unambiguously bad for Australia and the Asian region at large.”

However, these risks will most likely take a while to manifest – the first test of his presidency will be whether he follows through on his threat to name China as a currency manipulator.

For now, the outlook for the Australian dollar is that it will likely range in the US72¢ to US78¢ mark.