How the Markets React After the US Presidential Election 2016?
Some bright and famous guy (Google can’t seem to tell us who to attribute this quote to) once remarked— “America can elect who they want, but the world will suffer the consequences”. Nothing could ring sharper for speculators at the current period than this brutally applicable quote. From being vilified by global asset markets prior to his being elected, the Donald is now the messiah of the reflation trade. Genghis Khan and his army toiled on horseback through inhuman terrain to conquer the world. The Donald merely has to open his mouth now to shatter foreign equity markets, all Dollar crosses, global bonds and of course, hedge fund long and short portfolios that have been long Defensives and short Cyclicals. Can you even begin to imagine the high that the Donald is going through this minute? And this is even before he has stepped into office. He must feel like the incarnations of Lord Shiva, Vishnu, Brahma and the Pope all at once. The saviour. The Neelkanth.
Like the beginnings of every torrid affair, markets have embraced the Donald as if this was the beginning of something golden. To give the markets their due credit as the ultimate pricing mechanism created by humanity, everything that appears logical, has been discounted. Bonds have been crushed and rightly so. When the King of Leverage is put in charge of a country, what else would you expect? In one fell swoop, the American public have probably ensured a higher cost of running their already deficit filled lives for many quarters to come. And in the same breath, they have alienated their biggest financiers—The Chinese and the Japanese—both of whom are beginning to start to have internal discussions on the following lines : “Guys...the Donald is going to make it harder for us to export to the US. How are we to retaliate? Let’s get the hell out of their Treasury markets and bring our capital back home.” This is the flip side of an insular Donald policy. Sorry Donald, the markets will not let you have your cake and eat it too. Collapse global trade at your own peril.
The market that has screamed hard since the Messiah came into town and one that carries enormously damaging consequences for global deflation, is the Chinese Yuan. The CNY has gone vertical. So while we have all put on the Trump Reflation trade, that giant sucking sound that’s coming from the other end of tunnel is the Chinese currency. The global love affair is about to be put through its first stern test. Be alert.
Further elaborating on the heady cocktail upon us….
The first major casualty of this tectonic shift of plates is the Euro. The market, which has rightly started to put higher odds on a breakdown of the common currency, could now see some serious acceleration in the political unwinds. The UK was the first to jump off the titanic. The Great British Sterling took a huge hit and looks like the Euro is about to have a multiple handle move next. And why shouldn’t it? God knows where the next big popular vote is going to hit the incumbent - Italy, Holland, France, Germany? Take your pick. And meanwhile, the Chinese will export deflation to an already slowing down world. Look at the chart above to get an idea of what could be coming. Europe (SX5E) is breaking down against the SPX. And on the right, the CNY is getting weaker with every passing day.
Source Data: Bloomberg, Company Accounts, Third Party Industry Research. Author: Ashwani Mathur
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