Markets struggled in October with most asset classes down and cash proving the only asset to hold its value. Risk averse sentiment was driven by uncertainty in the lead up to the US presidential election.
Continuing with the theme of 2016 being a year of surprises, the reaction we saw as a result of Trump’s election is right up there with the biggest. Below is a chart of the S&P 500 futures, which at the point of send our US election update were down nearly 1,000 points, and then only hours later they rallied 1,400 points to finish up in the first US trading session following his victory speech.
The reaction we are now seeing is that markets believe that under Trump, fiscal policy will replace monetary policy as the primary policy tool to stimulate the economy. This means stronger growth, higher inflation, rising bond yields and a stronger US dollar. And in terms of US equities it means that companies most geared to the domestic economy will benefit the most: banks, industrials and materials stocks. In time, all of the above, should lead to an intensification of global reflationary forces, as other nations copy the Trump agenda.
In other parts of the world, surprisingly strong GDP figures emanating from the UK has calmed some post-Brexit nerves, and the Bank of England is now poised to keep rates on hold for the remainder of 2016.
Locally, the resilience of the Australian dollar continues to give the RBA headaches, however better than expected CPI data released during the month will please new governor Phillip Lowe. The RBA will maintain its neutral bias on interest rates and it is not expected that they will make any changes to the cash rate in the near future.