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Populism won again when Donald Trump was elected as the 45th POTUS. European and Asian markets reacted negatively, as expected, but their American counterpart behaved more calmly. After the initial binge in the gold market, the price of the bullion went back to its previous level. The S&P index was even edging higher as this article was being written. The day was not the end of the world, at least from the market’s perspective.
This fortune may last and prove that Trump is not that terrible for global investors. Or it may not. Another three months have to pass before Trump is formally inaugurated and his policies unfold. How consistently they will follow his claims made during the campaign will largely determine the market sentiment. But for now, his triumph will assert itself by rippling through the political communities around the world.
Take a quick look at continental Europe and one should quiver. Italy will have its constitutional referendum on December 4th that will decide if locals want to push for an “Itexit” from the European Union. On April 23rd next year, French citizens will determine if they want Marine Le Pen, a far-right politician and Trump’s counterpart in France, to become their presidents for the next five years.
Later the same year, the German Bundestag will witness if the right wing populist and Eurosceptic Alternative for Deutschland party and Trump’s German counterpart gains considerable political clout. The recent immigration crisis and the surprising Brexit vote have already fuelled mounting public support for these right wing parties. Trump’s historic coup demonstrates that populists should not be satisfied with a victory in a single county, they can win the whole country. Maybe even the whole world.
Such political burlesques in developed worlds will put gigantic pressure on emerging markets, as well as developed economies that are free from far-right headaches. All major emerging markets currencies witnessed a drop since the election result, with the Mexican peso depreciating the most – more than 8%. Trump’s wall-building promise along the US – Mexico border and his despise of the North American Free Trade Agreement (NAFTA) are both hurting investors’ confidence in Mexico’s future.
The currency of the second-largest economy in the world, China’s renminbi, is also suffering from Trump’s hostility towards the country and the possibility of a trade war.
Safe haven currencies such as the franc in Switzerland and the yen in Japan will also be facing appreciation pressures when investors turn risk-averse amid Trump’s further propositions in the future. The pressure is contrary to both countries’ central banks’ will. The Bank of Japan has a long history of fighting deflation. Further appreciation will only dampen its ability to restore the economy. Mired in a -0.2% inflation rate, the Swiss National Bank is by no means happy to see a rise in the franc.
Bond Markets Shudder
Ten-year government bonds in the US, Japan, Germany and Switzerland will continue to observe a slump in yield and a surge in price as markets are digesting the mid-term influence of a Trump presidency. Expect to see incessant swings in the Canadian dollar and Mexican peso FX markets amid the doomy days of NAFTA, and strong capital inflows toward safe haven countries and commodities.
Though the volatile market did not react as barmy as expected at the very beginning, the real uncertainty will come from the Fed in December. Indicted as a culprit of the Great Recession, the Fed received myriad criticism from Trump during the campaign and risks switching its helm earlier than expected.
A December rate hike may be halted should liquidity problems occur in the market. Political stability is one of the fundamental drivers of robust economic growth. How much unpredictability and unaccountability the mandate of “Mr Delirium” brings to American central banking will influence global investors’ confidence in the world’s biggest economy. Any deficiency in transparency or sufficiency in arbitrariness will sabotage the already knackered global economy.
Worldwide economies are far from recuperating from the financial chaos a decade ago. Globalisation was one of the reasons why that recession disseminated speedily. Now it is committing another sin that leaves the other part of the society behind.
Trump’s presidency is not the culmination of the clash between two divided groups of people but just the beginning. Expect a hysteric market in the approaching months.