Markets weigh Donald Trump victory

U.S. stock-index futures trimmed about two-third of their declines as investors reassessed a surprise victory by Mr. Trump in the U.S. presidential race.

Nov 9, 2016 @ 6:14 am

By Bloomberg News

U.S. stock-index futures trimmed about two-third of their declines as investors reassessed a surprise victory by Donald Trump in the U.S. presidential race.

December contracts on the S&P 500 Index lost 1.9% at 10:07 a.m. in London, after earlier sliding as much as 5% as investors rushed to price in a Trump win. Contracts on the Dow Jones Industrial Average lost 315 points, or 1.7%, to 17,970. A knee-jerk selloff in global stocks and a rally in haven assets eased amid speculation that Trump would increase fiscal spending to spur economic growth and as the Republican struck a more conciliatory tone in his first speech as president.

“In his speech, we saw Trump strike a markedly more emollient tone than he did throughout most of his campaign, which somewhat calmed the initial reactions,” said Ken Odeluga, a market analyst at brokerage City Index in London. “There is also the expectation that with Republicans in the Senate and House of Representatives as well, the party will exert a more benign influence on the White House. Still, it's a shock and there is no getting away from it.”

Earlier, declines in futures triggered the Chicago Mercantile Exchange's limit down price curbs when the contract fell below 2,029. The rules come into effect when S&P 500 contracts decline 5% from a reference price that is calculated in the last 30 seconds of trading on the previous day.

Today's losses followed a rally that began Sunday night on news the FBI had resolved its investigation of Hillary Clinton's e-mails. Heading into the vote, most polls had the Democratic candidate ahead by several points. The benchmark gained 2.6% on Monday and Tuesday, its third biggest gain ever in the two days before a presidential election.

A Trump victory, buttressed by electoral gains from Florida to North Carolina, had been portrayed by analysts as having the potential to unhinge markets that had banked on a continuation of policies that coincided with the second-longest bull market in S&P 500 history.

The stock market has shown itself more comfortable with the Democrat taking over the White House as Mr. Trump is considered less predictable after his policy positions have not been consistent during the race. At stake is leadership of the world's largest economy at a time when America is divided over immigration, trade and the country's role in the wider world.

Traders are especially on edge after the U.K.'s vote to leave the European Union was largely not predicted by polls and betting markets.

After plunging below 50%, the market-implied chance of a December rate hike by the Federal Reserve climbed to 84%, based on U.S. overnight indexed swaps that trade 24 hours a day.

The S&P 500 Index advanced 0.4% Tuesday to cap its biggest two-day rally since June. The index sits at the highest in two weeks after rebounding from a nine-day rout that was the longest slump in 36 years.

Final voter polls taken before voting began Tuesday showed Democrat Hillary Clinton with a narrow lead over Republican Donald Trump. The two have spent the past days campaigning in key states as polls showed the race had tightened. State-by-state surveys indicated a narrow lead for the Democratic candidate, while websites that take bets on the presidential victor showed her odds of winning the White House are generally about 80 percent.

The walloping in stocks will test the reliability of hedges built up over the last month as the election neared. Some of the biggest were tied to swings in the CBOE Volatility Index, the options-derived gauge of market stress which saw its longest streak of gains ever last week. Volume in VIX futures have been at or close to records in past weeks, a sign institutional investors took steps to mitigate a potential plunge.

“Hedges are pretty tricky when it's such a binary outcome of results, meaning that the initial reaction for a Trump victory was clearly going to create some volatility around the equity market,” said Mark Heppenstall, chief investment officer of Penn Mutual Asset Management which oversees $20 billion. “It's always hard to have effective hedges when there are expected outcomes.”

Regardless of how equity prices react today, next-day moves in the S&P 500 are useless in telling what comes after, as gains or losses over the first 24 hours predict the market's direction 12 months later less than half the time.

In the 22 elections going back to 1928, the S&P 500 has fallen 15 times the day after polls close, for an average loss of 1.8%. Stocks reversed course and moved higher over the next 12 months in nine of those instances, according to data compiled by Bloomberg.


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