Thursday November 10

Stocks continued to rise today following the election results. The S&P  500 rose  today 0.2% to 2,167 and the Dow Jones added 1.2% to 18,807 to a new record. Financials today rose 3.5% after a 5% increase yesterday on the expectation for  less regulation. Industrials, healthcare, and materials sectors were also up as well. Telecom, and tech companies were down. Economic data wise jobless claims came in below consensus. Trump and Obama met for 90 minutes today and the two struck a gracious tone and there was a positive outcome. The calming tone and more conservative behaviour and sentiment from Trump will be a positive for markets. On that backdrop the 2 year yield rose 3bp to 0.92%. The 10 year yield rose 9bp to 2.15%. 2yr vs 10yr bear steepened to 1.23%. The dollar continued to appreciate against peers. USD rose 0.16% against EUR to $1.0893. USD rose 1.1% against JPY to Y106.83. USD fell 1.2% against GBP to $1.2555. USD rose 3.7% against MXN to P$20.5754. Oil prices fell today after the IEA issued a bearish report. WTI fell 2.2% to $44.29. Brent fell 1.5% to $45.66. Gold prices eased back 1.2% to $1,258. Investment grade spreads have tightened as well as high yield (with the exception of HY health care). The market for Fed funds futures is now pricing in a 80% chance of higher rates in December.

Donald Trump met with Obama today and continued his conciliatory tone. Trump said he had “great respect” for Obama and the two discussed a wide range of topics. The intention of the meeting was to set up a dialogue so that the transition of power is successful between Obama and Trump. The meeting and gracious tone between the two is significant because Trump in the past was very adamant that Obama wasn’t born in the US. Obama as recently as yesterday said that Trump wasn’t fit to succeed him. Obama said he is excited that Trump is looking to work with his team and hopes that all parties can come together. Obama was set to discuss the policies he implemented and hopes that Trump won’t undo. However Trump is expected to have a different stance on health care, climate change, immigration, foreign policy, and regulation issues. The conciliatory and gracious tone struck between the two leaders is seen as a positive for markets.
Donald Trump’s emphasis on leaving NAFTA will likely have a significant impact on the automotive industry. NAFTA binds Canada, the US, and Mexico and Trump is looking to leave the agreement as a result of unfair trade which has led to job loss in the United States. Trump has singled out Ford as a company that is moving jobs out of the United States to Mexico in favor of cheaper production. Trump has said he will impose heavy tariffs on Ford if it follows through with its plans to produce in Mexico. It’s a difficult issue because many assembly plants in the US rely on components made outside of the US, and many non-US assembly plants rely on components made in the US. Integration as a result of NAFTA would make any potential outcome more difficult for the auto industry. Additionally some companies outsource certain components of labor to keep more high-tech production in the US which tend to be higher paying jobs. It is difficult because auto parts come from a variety of different countries and travel back and forth across borders multiple times throughout the supply chain.
Trump’s victory has led  to a sharp selloff  in fixed income markets due to the possibility of increased fiscal stimulus The two year  yield rose today  to 2.15% up from 1.83% on the eve of the election. It has similarly affected bond prices in Europe as well with the 10 year German bund touching 0.27%. Higher signs of inflationary pressure around the world have also been contributing to this trend as well. Higher fiscal spending on infrastructure and lower taxes would  increase the debt that needs to be issued, lead to a wider government deficit, and therefore be inflationary. Those factors all contributed to higher yields over the last two days. Higher inflation would lead the Fed to tighten monetary policy faster than currently anticipated. If adopted by other countries that could potentially lead to a shift in monetary policy and a scale back on easing. In the UK the government already said it intends to boost fiscal stimulus, and there is an idea that austerity in Europe may also have some adverse effects. Additionally a stronger US dollar would lead to weaker currencies in other developed markets which also reduces the need for monetary stimulus. In his acceptance speech Trump emphasized the importance to rebuild highways, bridges, tunnels, airports, schools, and hospitals. This type of fiscal spending would in all likelihood lead to growth and inflation. Coupled with some underlying inflationary pressures from the jobs market and international economic data, that led to the dramatic selloff. Accordingly breakeven rates have risen to the highest level in nearly a year. The 5y5y forward rate is now pricing in nearly 2.5% inflation.
Trump’s victory elicited wild fluctuations in markets during election night. S&P 500 futures at one point reflected a 5% drop at the open. The 10 year yield fell to a low of 1.72%. The 2yr fell to a low of 0.71%. However a big turning point was Trump’s acceptance speech. In the acceptance speech he emphasized fiscal spending, infrastructure investing, and tax cuts as opposed to protectionist policies. The conciliatory tone he struck also was encouraging for investors. Over the last two days the S&P 500 has risen 1.3% to 2,167. The 2 year yield has risen 20bp to 0.91%. The 10 year has risen 44bp to 2.15%.
Trump’s team of advisors includes many Wall Street professionals. Steven Mnuchin used to work at Goldman Sachs as the head of mortgage trading, and he is in line to be the pick for Treasury secretary. Henry Paulson and Robert Rubin also held that position and worked at Goldman prior. Investors hope that Trump will pick sensible and stable team members, which would likely continue the optimism seen in markets over the last few days. A professor who has been critical of foreign trade policy was tapped to be an advisor, as well as John Paulson given his understanding of the housing market. Stephen Feinberg of Cerberus Capital was also named to be an advisor. He also has support from the CEO of Renaissance. Accordingly his team has said it would “dismantle” Dodd-Frank, which it blamed for a slow economic recovery and that it would be replaced with policies that are better for growth. During the campaign Trump said he would roll back  or eliminate Dodd Frank.
Thursday November 10

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