The impact of Trump in three charts and FOMC preview

The big victory for President Trump and the Republicans has had a massive impact on financial markets around the world. Treasury yields surged, stocks reached new records and the dollar was king of the FX space. Animal spirits were unleashed, however, asset prices are calmer today. US Treasury yields are falling slightly, the dollar is lower and US stocks are rising moderately at the open on Thursday.

Below we look at the impact of the Trump trade on financial markets in 3 charts.

Global stock markets

The win for Trump in the US is good for US stocks, with the S&P 500 and the mid cap Russell 2000 surging. This has only exacerbated the performance gap between US equity indices and European and UK stock markets, as you can see below. We expect this to continue, as Trump’s America First policy plays out in global stock markets.

Source: XTB and Bloomberg

Can stocks sustain higher yields?

Usually, the Russell 2000 and 2-year US Treasury yields have an inverse correlation, when bond yields rise, this weighs on the US’s mid-cap index, as rising costs of capital could hurt medium sized firms. However, the Trump trade has seen US mid cap stocks rally at the same time as yields are also surging. We do not think that this can happen indefinitely. If US yields continue to rise, then it could start to weigh on US stocks. Once the animal spirits have abated, we think that that the US stock market rally could taper off, as investors start to consider the risks from a Trump presidency.

Source: XTB and Bloomberg

The rise of Tesla

Tesla was a standout performer on Wednesday as Elon Musk’s strong ties to Trump boosted the prospects of the company. While it can be useful to have friends in high places, the rise in Tesla is out of synch with declines in other renewable companies on the back of Trump’s win.

Rivian’s stock price has slumped in recent weeks, as the Trump trade has taken hold. Xcel Energy, one of the largest renewable energy producers in the US has also backed away from recent highs, and Pacific Oil and Gas, which is boosting its renewable production by 75%, has also fallen back on the back of Trump’s win. Thus, Tesla’s rally looks like an anomaly. Will it sell off because Trump is negative EVs? Or will Tesla and other domestic EV makers be able to garner the affection from Trump? If yes, then Rivian’s stock price could be ripe for a recovery.

Source: XTB and Bloomberg

FOMC expectations

The market reaction to Trump’s win complicates the outlook for the Fed meeting tonight. We expect the Fed to cut rates, however, after a surge in borrowing costs and a surge in stocks, along with Trump’s expected influence on inflation, they may refrain from committing to future policy moves. This could be interpreted as being a hawkish move, which may weigh on the dollar and stocks later.

There is still a 72% chance of a rate cut in December, however, we think that this is too richly priced and may get priced out later today.