April 24, 2017

Global Shock: Global Markets Plummet on Rising Odds of Trump Victory


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An employee of a foreign exchange trading company watching U.S. election results in Tokyo. Credit Toru Hanai/Reuters

Donald J. Trump’s surprisingly strong showing in the presidential race is throwing global financial markets into disarray.

In effect, markets had priced in a Hillary Clinton victory in Monday and Tuesday’s sessions, reflecting a firming of her position in polling. But as incoming results made a victory by Mr. Trump look increasingly probable, a furious reversal took place.

The Mexican Peso Fell Sharply

Peso/$

The steep drop across global markets as a Trump victory became more likely suggested that investors believe that the global risk premium — the compensation investors demand for all the varied risks around future economic and financial conditions — had risen. It suggests that if Mr. Trump prevails there could be global financial ripple effects.

Asian stock markets plummeted, as did futures on major stock indexes covering the United States and Europe, including a 4.8 percent drop in Japan’s Nikkei index as of 11 p.m. Eastern. United States Treasury bonds, typically a safe haven, rallied, pushing long-term interest rates sharply lower. The dollar was down 1.4 percent against other major currencies as of late evening, by which point Mr. Trump’s victory appeared probable in The Upshot’s election model.

There was a particularly steep sell-off in the Mexican peso, which had the steepest drop against the dollar since the country’s 1994-1995 currency crisis. The Mexican currency has consistently dropped when Mr. Trump’s prospects improved in recent weeks, suggesting global investors believe that a Trump administration — with its threats of renegotiating trade agreements — would spell bad news for the country’s economic outlook.

Oil Prices Also Tumbled

Dollars/Barrel

The price of gold shot upward. Gold is often a defensive play by investors whose fears about the economy are building. Surging higher than $1,330 an ounce, gold had the biggest upward movement since the unexpected Brexit vote in Britain in June.

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The swings across global markets suggest that investors believe a Trump presidency will be a deeply uncertain time for the global economy, and even that some of the fundamental underpinnings of global commerce could come into question.

Whether a political shift has long-term consequences is less certain. As I’ve written before, the complex feedback loops among political decisions, public policy and the economy aren’t always apparent after a political shock.

Asian Markets Fell Fast

Nikkei 225

Analysts have suggested that there are companies that could win in a Trump administration, benefiting from promises of lower corporate taxes and lighter regulation. But on the flip side, trade wars, a hard-line stance against international outsourcing and restrictions on immigration could prove bad for the bottom line for many United States companies.

Markets hate uncertainty, and few people are certain of what a Trump administration would do.

That said, market reactions can be volatile and overreact to the fundamentals of a situation. In June, when British voters elected to leave the European Union, global stock markets immediately sold off before stabilizing, and are now higher than before the vote.

But in the case of Brexit, there is still evidence that the economic consequences will be long-lasting, with Britain’s currency sharply below its levels before the vote, to around $1.25 compared with more than $1.50 on the eve of the vote.

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Article source: http://www.nytimes.com/2016/11/09/upshot/global-markets-plummet-on-rising-odds-of-trump-victory.html?partner=rss&emc=rss

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