The Oxford English Dictionary defines a monkey, among other characteristics, as “a mischievous person, especially a child.” After the events of 2016, Asia’s Year of the Monkey, few could disagree with the definition.
For once, the analysts got it right, when Asian and global markets reacted Tuesday to the election of Donald Trump as U.S. president exactly as predicted by The Diplomat, by selling stocks and rushing to the safety of bonds and gold in the predicted “Brexit times 10.”
U.S. futures on the benchmark S&P 500 Index plunged by their 5 percent limit, while European equities dived by their most since Brexit. The MSCI Emerging Markets Index, a measure of emerging markets equities, dropped by 2.1 percent, its worst performance in two months.
Among Asian bourses, Japan’s Nikkei Stock Average tumbled by 5.4 percent to a three-month low of 16,251, its biggest fall since Brexit, while Taiwan’s bourse lost nearly 3 percent, followed by smaller falls in Philippine, South Korean, and Hong Kong stocks. In Australia, the benchmark S&P/ASX200 index lost 1.9 percent, despite a rally in gold miners, which benefited from a 3.8 percent rise in the gold price to $1,324 an ounce.
Along with gold, other “safe haven” assets gained ground, with the Japanese yen advancing by 2 percent against the dollar, while U.S. bond prices rose. Oil prices also fell, dropping by around 2 percent.
“We were never meant to see Donald Trump in the White House, but this is the reality and traders just don’t [know] what to do,” Chris Weston, chief market strategist at IG, told the Nikkei. “Of course, when there is such uncertainty the appeal of gold, bonds, the Japanese yen increases and some of the moves seen in markets have been absolutely breath-taking.”
“Traders have so many questions, but have so few answers and this is the perfect breeding ground for increased volatility… We live in uncertain times and today that uncertainty has just hit new heights.”
John Vail, chief global strategist at Nikko Asset Management, described the election result as the “political revolution hits America.”
“Much like the Brexit vote, which seemed doomed at the end by the assassination of a key ‘Remain’ politician that was deemed to make many ‘Leave’ voters think their movement was hopelessly stained, Americans surprised the consensus with an anti-establishment vote,” he said.
“Whether President Trump can deliver new trends or not is open to question, but certainly attempts will be made and the rhetoric will change toward ‘silent majority’ populism, anti-‘globalism at all costs,’ deregulation and less progressive social policies, not only within the U.S., but globally to a large extent…Volatility in most affairs will be substantial, as it is with all major political changes, and civil unrest is likely to be large.”
Nevertheless, Vail said Trump’s ability to pass legislation would still be constrained since “he is not admired by many Republicans in Congress,” although he could still use his executive powers to affect the world’s biggest economy.
“In particular, rules regarding international trade are likely to change, especially regarding currency manipulation. Federal Reserve policies, although independent from the government in many respects, will likely become less dovish and entail new leadership before very long,” the analyst said.
“Although many of his policies are pro-business, especially regarding taxes and less regulation, risk markets will not likely respond well to his election for a while, especially given a less pro-trade environment, civil unrest, and likely major confrontations with Iran, North Korea, and China,” he added.
However, Fidelity International’s Dominic Rossi, global chief investment officer, equities, said the immediate sense of bewilderment would eventually give way to a more sober risk assessment.
“The immediate impact will be on the Fed. The probability of a hike in interest rates in December, followed by two further hikes in 2017, has fallen sharply. The dollar, which has been trending higher in anticipation, has consequently reversed. Both were threats to the bull market, and these have now been postponed. Monetary policy will remain accommodative,” he said.
“However, these known financial risks have been displaced by an unprecedented level of unknown political risks. We can only speculate whether Trump will follow through on his more protectionist slogans with substantive policies. Investors, particularly those overseas, will stand back and wait.
“Republican control of both Houses offers an opportunity to break the political gridlock of recent years in domestic areas of policy. There will be an eagerness to roll back many Obama initiatives, above all Obamacare. But none of this will convince investors in the short term.”
Other analysts said the U.S.-led Trans-Pacific Partnership (TPP) was effectively dead, along with the U.S. “pivot” to Asia. U.S. allies such as Japan and South Korea may also be expected to contribute more to the cost of maintaining a U.S. military presence, causing an increase in their defense spending.
But as previously noted by Pacific Money, any imposition of increased U.S. tariffs on Chinese exports could crimp economic growth in the world’s second-largest economy, causing reverberations across the region.
While Japan’s finance ministry reportedly held an emergency meeting following the election result, Japan analyst Jesper Koll said the U.S. ally and world’s third-biggest economy was ready for the fallout.
“Japan is well prepared for a Trump presidency. In my view, ‘Team Abe’ will surprise by speedy and constructive counter policy — a sizable fiscal ‘war chest’ has been put aside already, de-facto monetized by a Bank of Japan committed to cap borrowing costs at zero percent,” said Koll, chief executive of WisdomTree Japan.
“Moreover, once the dust settles and White House top-down economic policy leadership is re-established in Washington, corporate Japan could well benefit. Approximately 14 percent of the profits that Japan Inc. makes comes from North America-based production, so Trump’s promise of a sizable cut in corporate taxes could well add at least a couple of percentage points to Japanese earnings next year.”
Regarding the market reaction to buy yen and sell Japanese stocks, Koll described it as “de facto standard procedure.”
“Whether it turns into a genuine crash depends on Trump’s ability to demonstrate policy leadership. For currencies, a key force should be U.S. trade policy — if America turns outright protectionist by imposing tariffs on imports a structural downshift in the dollar is likely.
“Here, in my personal view, the hope is that President Trump turns out to be a pragmatist and deal maker. U.S. industry, which relies for almost half of its sales on the rest of the world, is poised to work overtime to prevent a Washington-led global trade war.
“Note here that not proceeding with TPP is not the start of a trade war. It merely keeps the status quo — no added benefits, but also, on its own, no added damage… Meanwhile, Trump’s election promise of ending tax inversions and incentivizing repatriation of overseas earnings should, at the margin, add to the demand for dollars.”
Koll said TPP legislation would still pass Japan’s parliament, while the Abe administration would have to find a new way to engage with its biggest trading partner in Asia. “The more hard-line Trump is, the more likely a Japan-China rapprochement becomes,” he said.
Nevertheless, Asian and world financial markets’ negative initial reaction suggests Trump has a hard sell to convince global investors of the merits of his “America first” agenda. After the trauma of Brexit and the U.S. presidential poll, 2017’s “Year of the Rooster” may offer more stability than the shocks of the monkey year.