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By Ryan A. Ross – consultant with Investors Group Financial Services Inc. in Windsor, Ontario. Find Ryan on Facebook here or reach him by phone at (519) 253-3553 Ext 201 for all of your investment needs.
Almost as surprising as Donald Trump’s election victory was the speed at which capital markets shook off the initial panic that hit stocks, bonds and currencies overnight. Despite a violent sell-off in futures markets late last night as Trump’s victory became apparent, North American equities were in the green within moments of the opening bell and continued to strengthen through the day. Early beneficiaries of safe haven flows such as gold and the Japanese yen gave up their gains commensurately, while crude oil reversed its earlier loss. The initial selloff was likely due to fears of trade disruptions and other impediments to long-term growth, whereas the rebound reflected a nearer term focus on economic stimulus and lower corporate tax rates.
Most dramatically, yields on U.S. 10 year Treasuries which initially dropped 14 basis points, likely on expectations of a less aggressive rate hike path by the Fed, reversed course quickly and were up more than 20 bps by mid-day, a surge of over 35 bps that brought them back above 2.00%! The upward push in sovereign yields reflects the expected inflationary impact of Trump’s tax and spending proposals and a likely massive increase in the federal debt level (not to mention anxiety over Trump’s loose talk during the campaign about defaulting on U.S. debt and less central bank independence.) Given these developments the Fed is almost certainly going to proceed with a December rate hike, an expectation that probably contributed to the Loonie being one of the few assets unable to fully retrace its overnight losses.
By the close, the S&P 500 had climbed 1.1% on the day, the Dow Jones Industrials were up 1.4% and the S&P/TSX followed along with a gain of 0.7%. Big winners in North American equities were, as expected, biotechnology and big pharma, financials, energy, all reflecting less regulatory headwinds, infrastructure and defence names expected to benefit from stimulus spending, and companies with overseas earnings that can now look forward to a favourable deal on taxation of those earnings as they are repatriated.
Today’s whipsawing in the markets is perhaps the best example of the folly of reacting hastily to developing news. Knee-jerk reactions are usually over-reactions. That being said, expect volatility to remain elevated until we see how much of Donald Trump’s campaign rhetoric he intends to pursue with action and how fast he intends to pursue it.
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