The Trump effect

Hi everybody!

Last week I talked about the Donald Trump election impact in december FED rate decision, which has changed dramatically in the current week in the markets where almost all the analysts are thinking there will be a december hike product of the higher inflation expectations that comes with what the markets believe will be the new administration expansionary public expense policies. In other words, what the market expects is a FED proactive approach and a rate hike in order to come ahead of the rise in inflation, after Yellen speech yesterday in congress it seems to be imminent a hike in december, let’s wait and see if that’s true.

But, today I don’t want to talk about the FED instead I want to talk about the election general impact in the markets. The public debt market shows the clearest signal, and it can be seen in the most liquid US bonds yield graph below, which shows the investor’s sentiment for the government who issued them. It is important keep in mind the inverse relation between the yield and the price, when the yield goes up the price goes down, this can be seen since last week with a sell tendency wich has taken the yield to beginning of year levels, this effect is called a selloff.

Grahp made by the author. Data: www.treasury.gov
Graph made by the author. Data: www.treasury.gov

An interesting aftereffect is that this behavior is not exclusive of the US bonds, it also happened to other countries public debt, among them Italy where the sentiment was if Trump won with a nationalist political position then what’s stopping the referendum detractors of winning and open a door to a change for an anti European union government?

But this doesn’t end there, the emerging markets where one of the great winners with the bonds low rate environment (high prices) becoming a very interesting place for investors, but with this new selloff in the debts markets, apparently bonds are back in the menu which leads to rebalancing portfolios and taking out money from these countries which in turn will lead to a depreciation of the local currencies.

Finally, there is an important effect in the stocks markets that comes from the Dodd-Frank act elimination, this act was created after 2008 crisis in order to made the banks more transparent with their information, however the Trump campaing thesis is that this act favored big banks and made them to big to fail which is a categorization of a bank whose participation in the economy is so important than its bankruptcy will be catastrophic for the economy as a whole and must be saved by the government no matter the cost. This action was perceived by the investor as a deregulation of the financial institutions, which increased the demand for their stocks and obviously their price.

So for this week I wanted to bring you my perceptions and views of the Trump effect in the markets, however these impacts are just from market perceptions because any decision or action hasn’t been made so basically everything is left to said.

Thanks, and have a great weekend!

*This post reflects the author opinion and must not be taken as an investment recommendation

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