In Depth

Post-Trump global bond rout to increase UK borrowing costs

Yields on UK government gilts have hit their highest level since before the Brexit vote

Donald Trump's stunning victory in the US presidential election has prompted "a wave of selling that has swept across government-bond markets", says the Wall Street Journal.

Since the result was announced last Wednesday more than $1.2trn (£960bn) worth of bonds have been offloaded by investors, says Bloomberg. Analysts reckon the "rout" could continue over the coming weeks.

Yields on ten-year government bonds in the US "are hovering around their highest level since early January after recording their largest one-week gain in more than three years", the WSJ notes.

Meanwhile in the UK the yield on ten-year gilts has risen from 1.36 per cent on Friday to 1.42 per cent this morning, meaning it is now back where it was before the Brexit vote in June, says The Guardian.

Yields on bonds are negatively correlated to prices. A spate of selling and a lack of buyer enthusiasm have caused a drop in prices over the last few days, driving yields to multi-year highs.

This suggests that governments will have to price bonds higher to sell them into the market in the current climate, increasing borrowing costs to service the UK's still-large budget deficit.

It's not just in the UK and the US that the trend is being observed. This morning, yields on ten-year Italian bonds hit their highest for 16 months, while in Germany they rose to the highest this year so far.

According to Bloomberg, the sharp shift in investor sentiment – until now investors have been major buyers of safe-haven bonds – reflects the view that Trump's big spending pledges will lead to a massive inflation boost.

When inflation rises this effectively reduces the return on fixed-income assets.

The wider risks this brings are roiling financial markets around the world. Gold is currently falling on fears interest rates will rise to counter the inflationary burst, while traders are fleeing emerging markets on expectations of a resulting "exodus of capital".

Overall money is being moved from safe assets into risk assets, with equities generally being traded up to the tune of $1trn (£800bn) in recent days.

US blogger and portfolio manager Matt Busigin argues that this confidence is seriously misplaced, says the Guardian, as it fails to factor in the "instability America could experience under their new leader".

Trump victory sends US markets to record high

11 November

US markets hit an all-time high on Thursday, defying predictions of an economic meltdown after Donald Trump's shock victory in the presidential election.

The Dow Jones, the US index of leading shares, reached 18,871.29 points before falling back slightly. It settled at 18,808, still a record closing level.

Yesterday's rise "defies the doom-laden predictions of many City analysts who predicted a huge sell-off if the Republican was victorious", says The Independent

Predictions "that Trump's unpredictability and protectionist economic policies would spook world markets has proved incorrect", it adds. Instead, focus has fallen on his pledges of major fiscal stimulus.

The highest gains since Tuesday's result have been in banking, due to the prospect of reduced regulation on Wall Street, and mining, which has been buoyed by his promise to increase infrastructure spending.

It was not all good news, however, as shares in technology companies Amazon, Netflix, Alphabet (Google) and Facebook all fell by more than four per cent amid fears Silicon Valley could suffer under the next US president.

Trump's criticism of companies who send manufacturing overseas and hire large numbers of skilled workers from abroad "could be bad news for the tech sector", says the Daily Telegraph.

Emerging markets were also hit over fears Trump could move towards a more protectionist approach to trade in the US. Throughout his campaign, the president-elect made repeated pledges to scrap existing trade deals, such as the North American Free Trade Agreement and the Trans Pacific Partnership.

There is also concern that a rise in US inflation as a result of increased spending could trigger more rapid increases in interest rates, which in turn could "spark capital outflows" from emerging markets, says Reuters.

MSCI's benchmark pan-emerging market equity index dropped 1.5 per cent to its lowest level since July. Indonesian shares were worst affected, slumping three per cent.

In Europe, the FTSE 100 was down 0.6 per cent to 6,787, while the German Dax was up 0.2 per cent to 10,652 and France's Cac 40 was flat on 4,528.

Markets 'phoney peace' continues after Trump election shock

9 November

It's being variously referred to by The Guardian as a "Trump bounce" or "Trump honeymoon" and by the BBC's Kamal Ahmed as a "phoney peace".

They're all referring to the surprising defiance of financial markets, which rebounded quickly from a sharp drop in the wake of the US presidential election and are now trading higher than before the shock result was announced.

Futures markets indicate the Dow Jones industrial average, one of the key equity benchmarks in the US, could open 0.8 per cent higher - an all-time high. It was up 1.4 per cent yesterday, while the S&P 500 increased 1.1 per cent to its highest level since early October.

In Europe, the FTSE 100 is up 0.9 per cent and knocking on the door of 7,000 and in overnight Asian trading, the Japanese Nikkei rose 6.7 per cent, more than erasing its five per cent loss on Wednesday.

Both the dollar and US Treasury yields are back either at or above Tuesday's levels.

The gold price also enjoyed a "Trump hump" and is now, at $1,281 an ounce, back to pre-election prices.

But why was the market meltdown short-lived?

A lot of focus was dedicated to Donald Trump's acceptance speech, which sounded statesmanlike and even included praise for his Democratic rival Hillary Clinton, who he has repeatedly threatened to put in jail as president.

The Financial Times also cites reassurance from senior Republicans, who moved quickly to make clear Trump's vice president, the experienced Indiana governor Mike Pence, would "play an outsized role" and "bring in heavyweight figures to his administration".

Anthony Scaramucci, a hedge fund manager and Trump economic adviser, said: "When people see that there are real adults on the team, the markets will calm down. Pence is key."

But the BBC's Ahmed suggests the main reason for the bounce back is that the market learned from the Brexit vote and the consequences of the election will not become apparent for some time.

"An overreaction now will just lead to a bounce back later, and investors are getting wise to that," he says. 

"How much of Mr Trump's campaign rhetoric will translate into actual policy? Until that is clear, this somewhat phoney peace on the markets looks likely to continue."

Trump victory speech soothes markets – a bit

9 November

"Volatility is absolutely rampant this morning," says The Guardian, reporting that global benchmark equity indices slumped in early trading before "roaring back" within the first hour following Donald Trump's "sensational victory" in the US presidential election.

The Republican's surge in the polls last week had already seen global markets enduring one of the worst losing streaks since the financial crisis – and for 36 years in the US. 

However, sentiment rebounded strongly on Monday, when Democrat Hillary Clinton looked likely to see off the billionaire, but they remained well down and this morning, tumbled again.

European markets were "suffering their biggest selloff since the Brexit shock", says the Guardian. The FTSE 100 was down around 0.8 per cent, the French Cac 40 by 1.7 per cent and the German Dax by 1.9 per cent.

Asia also slumped in response to news that Trump was on his way to the White House, with the Japanese Nikkei shedding five per cent and the Hong Kong Hang Seng two per cent.

The subsequent recovery has been material, though. The FTSE is up from an opening fall of two per cent, worth £37bn says Sky News, and is 100 points above its close on Friday.

Notably, the pound gained strongly on the US dollar in early trading but has since given back all of those gains. The greenback is also at a record high against the Mexican peso, which has become a proxy for market volatility in this election.

Losses have been pared in the wake of Trump's victory speech, in which he "issued upbeat remarks and applauded competitor Hillary Clinton", says the Financial Times.

In addition to sounding, in the words of Deutsche Bank's George Saravelos, "more presidential", Trump also vowed to invest heavily to boost the economy.

While there remains a lot of anxiety over how the mercurial businessman will lead the country, these comments are boosting sentiment towards the dollar and, alongside a more protectionist stance on trade, are "unambiguously bad for emerging markets", said Saravelos.

Markets rebound in big bet on Clinton

8 November

Global markets rebounded strongly on Monday as investors placed a confident bet that Hillary Clinton will win today's US presidential election.

After its first nine-day losing streak since 1980, the S&P 500 jumped 2.2 per cent to 2,132 - its best single-day performance in eight months.

In one session, it regained 72 per cent of the ground lost over the past week and a half.

In Europe, the FTSE 100 was 1.7 per cent up at the end of Monday trading, while the German Dax gained 1.2 per cent and the French Cac 40 added 1.9 per cent.

Investors fear a Trump victory will spell ruin for the US economy, due to his strident anti-free trade, protectionist rhetoric on the campaign trail. 

However, "Clinton is favoured by Wall Street as she is viewed as more status quo", says USA Today,  while her extensive experience as US secretary of state is seen as making her far more capable to be president.

Market confidence was boosted by Sunday's announcement from the FBI that Clinton has no case to answer over her use of private email servers to discuss matters of state.        

There has also been a record early voting turnout among Hispanic voters in key swing states, as well as a larger number of black and women voting earlier than in 2012, reports The Times. All three demographics strongly favour Clinton and leave Trump facing an "uphill struggle even before polling stations [open] today".

But Fawad Razaqzada, a market analyst at Forex.com, told USA Today it was "very risky" to assume Clinton was going to win. 

"The polls are still very tight and a lot of people will have made up their minds already, regardless of the FBI probe. So a win for Donald Trump is still a big risk, which may be underpriced," he said.

USA Today adds that the incumbent party candidate, in this case Clinton, "normally loses the election when stocks are down in the three months heading into election day". The S&P 500 stock index is down 2.6 per cent since 8 August.

Trump win could wipe 'trillions' off markets

7 November

"President Donald J Trump... It's a scenario that has a lot of investors worried," says The Guardian.

Already the fact that the Republican has a chance of winning tomorrow's election has rattled markets and sent the US equity benchmark, the S&P 500, on its longest losing streak since 1980.

Things will only get worse if the billionaire wins, experts warn.

"Barclays has said that a Trump win would presage a 'violent flight' from stock markets across the world. Citi believes that the S&P 500… would immediately drop by as much as 5 per cent," says The Times.

Experts told the Guardian a "nasty market shock" would take place if the Donald won – until recently his rival Hillary Clinton was expected to secure a comfortable victory. A Trump victory could trigger a sell-off starting at 10 per cent, only getting "worse from there".

"That shock would almost certainly be a global one, rippling outward from the peso and the Canadian dollar to the yen and European markets," the paper adds.

"With the companies in the S&P 500 alone valued at $19trn, and all global stocks about twice as much more, Wednesday could easily see several trillion dollars added to or subtracted from the notional wealth of the world," says The Times.

Worries about Trump centre on his anti-free trade, protectionist, rhetoric and its consequences for the economy.

Building a wall between the US and Mexico, scrapping a host of trade deals, cutting taxes on businesses and individuals even as spending on defence is hugely inflated, and potentially reneging on US debt commitments, are all policies economists say would be economically ruinous.

But not all the forecasts are negative. Writing in the Daily Telegraph, Roger Bottle says the effect one politician can have is too easily "exaggerated". Trump could even be a "success" if a market sell-off around the world led to softer monetary policies prevailing.

Markets are ignoring these debates today. The FBI has announced Clinton has no charges to answer over her use of private emails, so markets are rising on the renewed confidence of a Democrat win.

The dollar was up 0.5 per cent in London trading, while futures suggest the S&P 500 will buck its nine-session losing streak to jump 1.3 per cent. European shares are also up, with the FTSE 100 adding 1.4 per cent this afternoon.

Trump anxiety hits markets hard

4 November

Fears that Donald Trump could win the US presidency next week have sent markets around the world into a tailspin.

Most major stock indices have been falling following last Friday's revelations that the FBI has reopened its investigation into Hillary Clinton's private emails.

Since then, the polls have tightened, with one national survey even giving Trump a one-point lead, although that was well within the margin for error. 

As a result, market anxiety has gone into overdrive. 

The S&P 500, the benchmark equity index in the US, confirmed its "longest losing streak since the financial crisis" yesterday after falling for the eighth session in a row, says the Financial Times.

European markets are on track for their worst week since they hit their lowest level of the year in February, with "the sell-off steepening as the session develops". 

As of lunchtime on Friday, national benchmarks in the UK, France and Germany were all down by around one per cent or more. At the same time, gold is back above $1,300 an ounce as investors rush to safe havens.

Ken Odeluga, a market analyst at City Index, told The Guardian the "evasive action" on the part of investors is overdue and should have been "taken a month ago". 

Market fear is based in part on uncertainty at a change candidate and in part at the concern of how a man with no track record in government and with an apparently bellicose temperament will manage the world's largest economy.

During his campaign, Trump has threatened to default on US government debt, which the FT's John Authors says would lead to "Armageddon", and vowed to "reverse the process of globalisation" and inhibit trade.

But while markets are likely to react with "horror and a big sell-off" if Trump does win, the journalist says, the trajectory thereafter will follow the "Brexit playbook" - a fall in the dollar and a rebound in stocks, at least until there is greater clarity on the implications of the vote.

"Trump will create a colossal panic, but the relief rally will be outstanding," Lawrence McDonald of ACG Analytics told the New York Times.

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