Why Markets Reversed After The Trump-Slump

Today’s calendar is thin, so focus will remain on the economic implications of the Presidential Elections in the US. Yesterday’s result ignited a turmoil that surpassed the one caused by Brexit on the 23rd of June. In fact, trading volumes nearly doubled Brexit. Fears that Donald Trump’s risky foreign and immigration policies would hinder US growth, sent stock markets and the USD into a plunge. In a quick fashion though, the picture was reversed following his first speech after the election results, resulting into Stock markets recovering all their losses and closing near record highs. The USD, which after the election plunged, quickly reversed its losses and came back even stronger than before. The wild swings noticed yesterday, can be explained when one takes into the account the change in estimations regarding a rate hike in December, which after the election dropped to 35%, only to close the day at 80%. 

Currencies:  As mentioned above, the USD plunged initially after the election results. Indicative of the price action, EUR/USD spiked from 1.1050 to 1.1300 only to close the day at 1.0950. Similar picture was also seen in USD/JPY which initially dropped to 101.30 from 105, only to post new highs at 105.93. The biggest mover of the day was the USDMXN which surged 14% posting record highs. It too however closed the day with only 8% gains, after Trump’s speech. So why did markets quickly reverse the knee-jerk reaction that was seen in the initial stages? There are a number of reasons but here are few: 

• In his speech Trump noted a substantial spending increase in infrastructure. This is substantially different than the path to growth that is noticeable today which is mainly through monetary policy (keeping rates low so as to improve lending). This will also ensure millions of jobs.
• Massive tax cuts that were promised by him, are speculated to boost investment and increase the disposable income by people.
• His words did not include any bravado over foreign policy, walls or deportations. Instead, he tried to unify Democrats and Republicans and people from all races and religions.