Wednesday September 9

Stocks rallied after Trump’s victory contrary to early expectations and market movements. The S&P 500 rose 1.1% to 2,163 and the Dow Jones rose 1.4% to 18,589. The KBW Bank index rose nearly 5% while utilities sold off 3.4% as interest rates sold off dramatically. Early market moves as Trump’s victory came more apparent suggested that risk off would be the play in markets. Stock futures sold off and the 2 year rallied down to 0.73% at one point. However it appears that Trump’s election speech, which focused on infrastructure spending and tax cuts more than protectionist policies swayed opinion. As a result of that it was expected that his policies might be more friendly towards corporations and inflationary in nature. On that backdrop rates sold off significantly. The 2 year yield rose 5bp to 0.91%. The 10 year yield rose 21bp to 2.08%. The 30 year yield rose 24bp to 2.87%. Accordingly 2yr vs 10yr bear steepened to 1.17% from 1.01% the day before. In FX markets the dollar appreciated against most peers. USD rose 1% against EUR to $1.0915. USD rose 0.7% against JPY to Y105.85. USD rose 9% against MXN to P$19.91. Oil prices rose. WTI rose 1.1% to $45.48. Brent rose 1.4% to $46.7. Gold prices held steady at $1,274.90. The VIX sold off 21% to 14.77.

 

Bank stocks have benefited from the election results, with the KBW Bank index rising nearly 5% by the end of the day. Less regulation would be the primary driver of this movement, and now investors in financials will not have to worry about Elizabeth Warren or Bernie Sanders in any legislation. This will benefit smaller banks primarily, and Trump has in the past criticized Dodd-Frank as unnecessarily harsh. For example the rules for what is considered a SIFI may be increased to help out those smaller banks. Currently the level is at $50bn in assets and some analysts expect that could be raised to as high as $500bn or even abolished altogether. Smaller banks have been very negatively affected by SIFI designation because they have to carry out costly stress tests. Some analysts believe that taking away the SIFI designation would lead to further consolidation in the regional bank space. However it is expected that the main principles of Dodd Frank will likely remain as many executives have noted that it has reduced risk in the industry. It is also important to note that monetary policy is also more uncertain now regarding the expiration of Janet Yellen’s term in January 2018. The market for Fed futures is currently pricing in a 72% chance of higher rates next month which is down from yesterday but still elevated.

Immediately following the election result the market for Fed funds futures fell to reflect a 67% chance of higher rates however that number later stabilized. Before the election it was expected that December was the time for higher rates however now that’s cast into some doubt. The Fed does not like uncertainty and volatility in the markets, and Yellen has been receptive to uncertain conditions before (as it relates to China). How markets price in Trump’s victory will be likely indicate the stance that the FOMC takes next month. Trump has wavered somewhat in his views on the Fed however he has criticized Yellen for keeping interest rates low to help the democratic party. At the very least analysts expect that with the president more vocal about monetary policy it could put credibility under pressure. There will also be two vacancies on the Fed’s board of governors for Trump to fill.

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Wednesday September 9

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