9 novembre 2016

Trump: Brexit rewind

novembre 9, 2016

After the UK Brexit vote, Donald Trump’s election has been a new victory for the anti-establishment wave which roils worldwide political regimes. This rise of protectionism portends a decrease in global trade and an increase in inflation.

 
 

In the short run, observations derived from market prices dynamics and quoted risk premiums enable us to highlight the following investment themes:

 
 

1.       Global equities tumble but the correction is milder than the one we could have expected following Trump’s surprise victory. (figure 1)

 
 

2.       Implied volatilities on equities did not rise so much (+2 pts in the US, +1 pt in Europe).

 
 

3.       Nevertheless, volatilities rose sharply on currencies following deep corrections on carry trades and emerging currencies (Mexican peso collapsed 8% whereas yen rose 2% since Trump was elected). (figure 2)

 
 

4.       Credit markets were barely impacted (rise of 11 bps in Itraxx Crossover in Europe). (figure 3)

 
 

5.       The main investment theme seems to be focused on precious and base metals. The latter surged 8% since the start of November while Gold rose 2.5% since yesterday. The advent of Basic Resources as the best performing sector in Europe is particularly noteworthy (+2.5% in the face of an equities drop).

 
 

6.       The latest rise of commodities involve higher inflation perspectives which are reflected in bonds markets. As a matter of fact, yields rose in the long end of the curve (+12 bps in the US 30 years) as the curve steepens. Inflation anticipation has risen steadily in the US since the end of September (+20 bps).

 

 

 

Figure 1: Global equities tumble (source Bloomberg)

 

 

Figure 2: Forex movements on the aftermath of Trump presidency (source Bloomberg)

 

 

Figure 3: credit spread barely impacted ( 11bps) (source Bloomberg)

 

Published on Riskelia’s Blog
http://www.riskelia.com/blog

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