Article / 09 November 2016 at 12:56 GMT

Mid-session Europe: Trump shock roils markets

Saxo Markets
Denmark

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Foreign exchange

FX
 

Markets clawed back from deep initial losses on Wednesday after the real estate billionaire and reality TV host Donald Trump won an upset victory over Democrat Hillary Clinton in Tuesday's US presidential race.

Stocks and other risk assets plunged, while safe-havens gained as the world got to grips with the startling prospect of a Trump presidency. Commodity, mining and healthcare sectors were the biggest beneficiaries initially from the Trump surprise.

Markets saw very volatile trading on the back of Trump’s victory, but the risk-off loses were recouped across relevant asset classes, with tensions soothed by Trump’s relatively neutral acceptance speech.

European Central Bank officials did their part to calm the markets and reiterated the intention to keep the accommodative policy in place until inflation targets are reached. Bear in mind, however, the upcoming political risks in the European Union: Italy's constitutional referendum in December, Dutch, French and German elections next year as well as Brexit talks approaching.
 
Japanese government and Swiss National Bank officials declined to comment on any possible intervention in the yen or Swiss franc.

Chinese October PPI hit its second-highest level in years when it rose 1.2% year-on-year, confirming that China is becoming an exporter of higher prices globally.

 
Watchlist
  • US: MBA mortgage applications (1200 GMT)
  • US: Wholesale inventories and wholesale trade sales for Sept (1500 GMT)
  • US: DOE weekly crude oil inventories (1530 GMT)
  • US: USDA publishing WASDE crop report (1700 GMT)
  • New Zealand: RBNZ official cash rate (2000 GMT)
Speakers
  • Eurozone: ECB’s Nouy speaking (1400 GMT)
  • Eurozone: ECB’s Cœuré at panel discussion (1645 GMT)    
  • US: Fed’s Kashkari speaking (1830 GMT)

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Forex developments

Significant volatility hits FX markets after Trump’s triumph in the US presidential elections.
The USD Index has been sharply lower in the early hours on the initial assessment of Trump’s win, touching the 96 level and below. The decline, however, has not yet proved to be long-lasting, and the instrument has recovered to a current level of 97.30.

EURUSD, as well as most of the G10 currencies traded vs the US dollar, followed the USD Index pattern, with the greenback erasing most of the morning losses. This was apparent in EURUSD pulling back to below 1.11 (from 1.13 early maximums) and in GBPUSD, which has fallen through 1.245 again.

USDJPY is recovering on a slower pace, keeping the daily’s -2%, which is 103.00 and around that level. True to tradition, JPY is staying bid in the volatile surroundings.

The Mexican peso dropped to a record low at 20.78 vs USD on worries about future US trade policy with Trump leading the Cabinet Room. USDMXN off highs, +8.4% on the day, trading currently at 19.86.


FX Options volatilities
 
Vols

vols
 
Very volatile o/n markets. The big moves in US yields have also been reflected in the currency pairs.

USDJPY traded as low as 101.30, with US 10-year yields down 17 tics and 1-month USDJPY was paid at 16%. At the European open, all started to correct, and US 10-year yields are back where they were yesterday, USDJPY has traded as high as 103.70 and 1-month volatility is now trading at 11.2%, down 5.8% from the highs.

The market seems to have accepted the US election results and is now looking forward to the next event (Italy’s constitutional referendum on December 4).

Overall, EURUSD and USDJPY are trading in a highly correlated pattern with US yields, and this will probably continue.
 
Volatility was sold throughout the morning in all major pairs.

Risk reversals are correcting the last few days’ move, so now we see USD puts less bid.

chart
 
Fixed income

chart
 
The fixed-income space experienced a huge flight to safety on the back of the overnight US election surprise. Bunds were highly in demand, which helped push yields close to negative territory. The initial drop in US yields was recouped, and the 10-year US Treasury yields are now back to around 1.93%.

All of the big move can likely be explained by the speculation of huge fiscal stimulus from the incoming Trump administration that will lead to higher deficits and increased financing needs.


Commodities

chart
 
d
Equities

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European stock markets opened sharply lower on Wednesday after Republican candidate Donald Trump won the US presidential election, sparking worries across global financial markets. But equity markets rallied off lows, with traders saying Trump's acceptance speech was balanced and conciliatory, raising hopes that some of the more fiery rhetoric of his campaign might be behind him. Germany’s Dax fell 0.8% to 10,398.24 points, while the CAC 40 lost 0.8% to 4,439.22. The FTSE 100 fell 0.1% to 6,836.75, with losses curbed by the index’s gold miners.

The election outcome sparked a flight to safe-haven assets, including gold and precious-metal stocks. Among miners, Fresnillo jumped 8.7%, while Randgold Resources leapt 6%.

Among stocks getting sold off, Danish wind-turbine maker Vestas Wind Systems slumped 6.7%. Trump is seen as likely to cut back on subsidies for green energy. Another big loser was Spanish bank BBVA, down 7.6%. It had been tipped by analysts to suffer if Trump won, as it has the biggest Mexican revenue exposure of all European banks. The Mexican peso slid 13% on Wednesday.
 


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Mid-session Europe is part of TradingFloor's stable of commentary running through from the US close, through Asia to the European session. Click below to keep abreast of all the developments as they happen.



Donald Trump
 Real estate tycoon and reality-TV star Donald Trump scored a historic surprise 
victory, against pollsters' predictions.


— Edited by John Acher and Clare MacCarthy

The Global sales Trading desk is a multi-asset team providing customised trading solutions

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