US election Archives

Year of Surprise

FX Weekly FX 2016 Review – Year of Surprise

Highlights

2016 has been full of surprises and can be divided into three distinct phases defined by the EU referendum and US election.
Currently the market is in a period of re-pricing due to Trump’s proposed fiscal expansion plans.
The USD looks likely to hold onto recent gains, while the EUR look vulnerable to political uncertainty in the year to come.

Against all odds

Surprises have been commonplace in 2016 and have ensured that volatility has remained a prominent feature of the world’s currency markets. The year can almost be divided into three distinct phases marked around the shock outcomes in both the EU referendum and the US presidential election. In the period up to, and the month following, the Brexit vote, concerns over the economic impact of the referendum and reduced expectations of monetary tightening in the US saw safe havens like the JPY soar against the GBP and USD (rising 26% and 16% respectively from 1st January to the 6th July). These moves moderated somewhat until the US election, where Trump’s shock victory ushered in a complete shift in market assumptions and a corresponding re-pricing of financial assets. This is the current phase that we find ourselves in, characterised by the strongest trade weighted USD in over 14 years and a sharply weakening JPY. Going into 2017, we see healthy prospects for US growth and inflation buoying the USD, while in Europe the single currency risks being pressured by political uncertainty.

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US reflation?

Markets appear to have interpreted Trump’s victory as a signal that the US will benefit from a large fiscal stimulus and infrastructure package in the years to come, helping to deliver both growth and inflation. While a lot of the details surrounding Trump’s future plan are currently uncertain, what seems clear is that the recent increase in inflation expectations have prompted the US Federal Reserve to pursue a more aggressive rate hike path. Should they follow through with the proposed three hikes in 2017 we see recent gains in the USD as being broadly sustained, although a near term pullback in the next few months may be due.

Populist sentiment tested

In Europe, scheduled parliamentary and presidential elections in a majority of the bloc’s largest nations have potential to test the Euro. Matteo Renzi’s recent resignation is a signal that anti-establishment sentiment on mainland Europe remains elevated and the growth of populist parties is not as remote a risk as market participants once thought. Combined with a European Central Bank (ECB) committed to at least another 12 months of asset purchases, risks for the EUR appear skewed to the downside.

Transitional Brexit deal to be brokered

Prospects for the GBP are centred on the progress of Brexit negotiations and the UK government’s ability to deliver an effective transitional agreement offering protection for Britain’s more exposed sectors, such as finance. We remain bullish on the currency and believe that it is currently trading near its structural nadir (see: GBP reaches rock bottom). However, it will remain volatile as markets scrutinise any plan Theresa May puts forward before the self-imposed March deadline for Article 50.

Investors wishing to express the investment views outlined above may consider using the following ETF Securities ETPs:

Currency ETPs

GBP Base

ETFS Long EUR Short GBP (GBUR)
ETFS Short EUR Long GBP (URGB)
ETFS Long USD Short GBP (GBUS)
ETFS Short USD Long GBP (USGB)

USD Base

ETFS Long GBP Short USD (LGBP)
ETFS Short GBP Long USD (SGBP)
ETFS Long EUR Short USD (LEUR)
ETFS Short EUR Long USD (SEUR)

EUR Base

ETFS Long USD Short EUR (XBJP)
ETFS Short USD Long EUR (XBJQ)
ETFS Long GBP Short EUR (EUGB)
ETFS Short GBP Long EUR (GBEU)

ETFS 3x Long USD Short EUR (EUS3)
ETFS 3x Short USD Long EUR (USE3)
ETFS 3x Long GBP Short EUR (EGB3)
ETFS 3x Short GBP Long EUR (GBE3)
ETFS 3x Long GBP Short USD (LGB3)
ETFS 3x Short GBP Long USD (SGB3)
ETFS 3x Long EUR Short USD (LEU3)
ETFS 3x Short EUR Long USD (SEU3)

ETFS 3x Long USD Short GBP (USP3)
ETFS 3x Short USD Long GBP (PUS3)
ETFS 3x Long EUR Short GBP (EUP3)
ETFS 3x Short EUR Long GBP (SUP3)

ETFS 5x Long GBP Short EUR (EGB5)
ETFS 5x Short GBP Long EUR (GBE5)
ETFS 5x Long USD Short EUR (5CH5)
ETFS 5x Short USD Long EUR (5CH6)
ETFS 5x Long USD Short GBP (USP5)
ETFS 5x Short USD Long GBP (PUS5)

Basket

ETFS Bullish GBP vs G10 Currency Basket Securities (LGBB)
ETFS Bearish GBP vs G10 Currency Basket Securities (SGBB)
ETFS Bullish USD vs G10 Currency Basket Securities (LUSB)
ETFS Bearish USD vs G10 Currency Basket Securities (SUSB)
ETFS Bullish EUR vs G10 Currency Basket Securities (LEUB)
ETFS Bearish EUR vs G10 Currency Basket Securities (SEUB)

The complete ETF Securities product list can be found here.

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President Elect Trump– Geopolitical & Market Implications

President Elect Donald Trump’s ability to resonate with the populist mood has proven successful – populism in the developed world is on a worrying rise. We have collated what we believe are the most important investment implications of Donald Trump winning the US election.

Politics

The uncertainty around Trump’s political agenda and the possible increase in protectionist measures could weigh on global trade and ultimately dampen the global economic outlook, favouring bonds over equities
It is likely there will be panic amongst Nato allies in the Baltic states as Putin may decide to use Donald Trump’s friendly relationship to position troops in the region
In Europe in 2017 there are elections in France, the Netherlands, Germany, Austria and potential for an election in Italy. In these regions many populist parties are either leading or rising rapidly at present leading to further market volatility in 2017

Currencies

Currency vigilantes are likely to act. A sharp fall in the USD will result as uncertainty over trade and foreign policy jumps
Rising FX volatility is another negative for the GBP. GBP moves inversely to volatility and will likely sell-off against major currencies. JPY and CHF will be the big gainers under a Trump Presidency
MXN will experience a sharp fall as anti-Mexican sentiment from Trump is likely to depress investor optimism about the future of NAFTA and the benefits that accrue to Mexico from free trade

Equities & Gold

Donald Trump has been critical of loose monetary policy and is likely to seek a new governor with a more hawkish outlook when Yellen’s tenure is complete. Investors are likely react negatively to this monetary policy uncertainty
Furthermore, US equities are trading at a 50% premium to their long-term cyclically adjusted valuations, making them more vulnerable to a sell-off. Consequently, some equities are likely to hit their limit down (5% fall) and therefore have trading suspended
A weak USD is likely to benefit the S&P100 as 50% of revenues are derived from abroad, although, in the shorter-term they are likely to decline too.
A Trump win is likely to drive gold prices higher as investors seek a haven asset in a similar manner to what we saw during Brexit. Gold miners will likely benefit as they have a 2.4x beta to the gold price
Donald Trump has pledged $550bn of infrastructure spend, having control of both the House and the Senate means he has a higher chance of getting these proposals approved. Industrial stocks that maintain civil infrastructure are likely to benefit from higher opportunities for government projects under Trump

James Butterfill, Head of Research & Investment Strategy at ETF Securities

James Butterfill joined ETF Securities as Head of Research & Investment Strategy in 2015. James is responsible for leading the strategic direction of the global research team, ensuring that clients receive up-to-date, expert insight into global macroeconomic and asset class specific developments.

James has a wealth of experience in strategy, economics and asset allocation gained at HSBC and most recently in his role as Multi- Asset Fund Manager and Global Equity Strategist at Coutts. James holds a Bachelor of Engineering from the University of Exeter and an MSc in Geophysics from Keele University.

Market Commentaries on the US election from Jupiter Asset Management

Market Commentaries on the US election from Jupiter Asset Management:

Market Commentaries on the US election from Jupiter Asset Management

Charlie Thomas, manager of the Jupiter Global Ecology Growth SICAV:

Donald Trump’s rhetoric during his campaign will likely place pressure in the short term on renewable energy companies, but looking through the noise, he won’t need to remove clean energy subsidies as the existing policy will in fact already phase out subsidies by the end of his first term, in recognition that the pace of renewable technology progress means that they will largely no longer be required.

While it is still too early to predict the long-term consequences of the election, both in the White House and on Capitol Hill, we are mindful that despite a rancorous campaign, one of the few areas that the democrats and republicans found common ground is the pressing need for US infrastructure investment. This bodes relatively well for companies providing environmental solutions particularly in the water, smart energy and rail transport infrastructure.

Sebastian Radcliffe, manager of the Jupiter North American Equities SICAV fund:

The difficulty in assessing the impact of a Trump win is the scope of uncertainty as to what he would actually do. The short term impact is likely negative for equities as the greater uncertainty translates into a higher risk premium. However based on the broad thrust of his comments so far he is likely to initiate substantial fiscal stimulus that could materially accelerate the economy. While the market will fret over the uncertainty, the reality is that there is a material separation of powers where substantive legislative change requires approval of both houses of congress and there are sufficient moderate Republicans to join their Democrat Congressional colleagues in halting some of the more wild eyed initiatives that might come out of the new President.

Ariel Bezalel, manager of the Jupiter Dynamic Bond SICAV fund:

Donald Trump’s victory has raised the level of market uncertainty we can expect over the coming months and as such is likely to prove negative for risk assets (equities, credit spreads) in the short term. Conventionally, a risk off environment, in this case the end of the US election campaign resulting in a Trump victory, should benefit US Treasuries short term. However, medium term this is unlikely to be the case since Trump has been particularly vocal on the need to boost fiscal spending, saying he wants, at the very minimum, to double Hillary Clinton’s proposed $275bn infrastructure programme, a measure he said he would fund via debt issuance. A debt-funded infrastructure programme of this scale could help to stimulate the economy and be quite inflationary – an environment that would be negative for rates and fairly positive for equities. Therefore, longer term we expect the US yield curve to steepen.

We did not position our portfolio specifically to benefit from a Trump or a Clinton win. However, generally, it is our belief that monetary policy has reached its limits, whether it be in the US, Europé or Japan among others; future stimulus is very likely to be fiscal in nature. Trump is likely to deliver an expansionary policy to encourage economic growth. It would have been the same if Clinton had won. This shift in thinking about the nature of stimulus going forward was one of the key reasons why we reduced the duration of the portfolio significantly since July from 5.1 to 2.9 years today. We did this mainly by selling our medium and long dated US Treasuries and initiating a short position in the bund (around 10% of the portfolio) back when they were trading with negative yields.

Additionally we have:

Put in place some credit spread hedges (2.16% North American HY CDX and 2.95% European Crossover)
Trimmed the longer dated investment grade and high yield bonds we own. 50% of the portfolio has a maturity under 2 years.
Positions in gold mining convertibles (1.9% of the portfolio). These should help in a risk-off environment.

Jason Pidcock, manager of the Jupiter Asia Pacific Income SICAV fund:

In foreshadowing this Trump win, investors have been selling out of equities and keeping their powder dry. If this continues, and the fear of a recession under a Trump presidency spreads, we believe it is likely that the US Federal Reserve may well postpone its much-anticipated December rate increase.

Paradoxically, such a scenario might create an ideal environment in which the Jupiter Asia Pacific Income Fund could flourish; bond prices would be pushed up, yields would fall and investors seeking income would be practically forced to continue to search for yield in equities. Then again, what good is outperformance when you’re only able to do so on a relative basis against a turbulent market.

Asian stocks that derive a significant portion of their revenues from the US market may see short to medium term volatility, driven by market sentiment. Within our fund, these are mainly IT and electronics companies like Hon Hai, Delta and TSMC, that are based in Taiwan and play a big role in the Apple/iPhone supply chain.

At a country level, we believe the Philippines will continue to be a risk: whether President Duterte likes it or not, the country does have economic ties to the United States. It has one of the largest call centre operations in the world, and American companies are a huge employer in this field. If there is one small consolation for us, it is that Trump’s election means Duterte is arguably no longer the most controversial head of state in the world! Trump, we believe, is likely to spark any number of diplomatic rows as his presidency gets underway, but for the Philippines, we think a lot of the bad news has already been priced in. We remain overweight, but aren’t adding any more positions until we see how things pan out.

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