What’s going on?
The markets have been all over the place since Donald Trump election. Let’s look at the key trends in share markets first. One is a rise in industrial equities – big companies in areas such as engineering, mining and materials which could benefit from a big US spending programme on infrastructure. However, technology companies have weakened, largely on fears that trade tensions with Asia might damage the business models under which they subcontract work there. As we don’t know which parts of his programme Trump may enact, or when, this could all remain quite volatile as sentiment towards different sectors ebbs and flows.
Didn’t everyone forecast falling markets if Trump won?
Yes they did. It was thought that fears about protectionism and a big rise in the US deficit would upset investors and lead to shares getting hammered. This hasn’t happened so far, as investors have focused on the prospect of a big fiscal expansion, or stimulus, in the US. Also, in a reversal of expectations, the US dollar has gained and gold, the traditional safe haven in times of uncertainty, has fallen sharply.
Is everything on the up?
Far from it. One really interesting trend has been big falls in government bond markets, pushing up long-term interest rates sharply. A view is starting to emerge that Trump will expand US budget policy and that this will speed the rise in interest rates. Initial expectations that the Fed might have to hold off increasing interest rates in December have been replaced by a view that they will move next month and that there will be more hikes moving into next year. This is what has led to the declines in in bond prices and rising long-term interest rates. Irish 10-year rates have risen from 0.64 per cent to 0.98 per cent over the past week. The upcoming Italian constitutional referendum – which threatens the Renzi government – has also increased fears about EU bonds. The long era of super-low interest rates may be starting to come to an end, although nobody expects the ECB to increase its base rates for quite some time yet.
Anything else?
Yes. So-called emerging markets – the likes of Indonesia and South Korea – have been severely affected, with their currencies in particular falling sharply, in some cases requiring government intervention. There are two reasons for this. One is that the prospect of a higher dollar and rising US interest rates has attracted funds back to the US, the other is fears of protectionism hitting emerging markets, particularly those in Asia, but also – of course – Mexico.
