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Global Markets, Initially Shaken, Edge Higher After Trump Victory Stock Markets, Initially Shaken, Edge Higher After Trump Victory
(about 2 hours later)
As the realization worked its way around the planet that Donald J. Trump would become the next president of the United States, global investors tried to make sense of the financial and economic implications, putting markets on edge. After a sharp sell-off overnight in Asia, markets staged a recovery on Wednesday as investors shook off the shock of a Donald J. Trump presidency and began to focus on whether his mix of policies could spur a still-fragile global economic recovery.
Futures for the Standard & Poor’s 500-stock index initially plunged 5 percent but recouped nearly all their losses when stocks started trading in the United States.
By their nature, markets are wired to look beyond the moment and into the future. In that regard, the bounce-back in stocks reflects the bet being made by many investors that Mr. Trump’s promises to increase government spending, cut taxes and ease financial regulations will outweigh his strident anti-trade rhetoric.
To that end, stocks that would benefit from more robust economic growth, like banks and companies tied to infrastructure and transportation, were in demand on Monday. By midafternoon, shares of Bank of America were up 5.5 percent, while those of the equipment rental company United Rentals were up 14 percent.
More broadly, however, market experts said that Mr. Trump’s victory should be viewed as a loud signal from Main Street that the time had come for fiscal policy in the form of increased government spending to replace central bank activism as a means to stimulate economic growth.
“This was a political uprising,” said Jurrien Timmer, a market strategist at the mutual fund giant Fidelity Investments in Boston. “Monetary policy has been part of the problem, in that the wealth effect has not accrued equally. If the baton is passed toward fiscal policy, that would mean higher inflation and lead to a rotation toward cyclical stocks such as financials.”
For quite some time now, economists have been warning that the reliance of governments in the United States and elsewhere on central banks to energize economies via zero interest-rate policies and buying back securities was creating an uneven recovery by bolstering the housing markets in New York, London and San Francisco while real economies lagged.
“The economic recovery under President Obama never reached deep enough — it did not bring working-class people up,” said Justin Gest, a public policy expert who has just written a book analyzing how working-class men and women in the United States and Britain have become alienated. “And the nature of the economy that Wall Street and corporate America has promoted reflects the gaping inequality in this country.”
Increased government spending on highways, bridges and roads may well provide a lift to the broader economy, and tax cuts and looser regulations will be cheered by the financial markets.
But there are downsides to these approaches, including increased deficits and levels of debt.
Moreover, market analysts wonder how Mr. Trump will balance these policies, which are mostly positive for financial markets, with his promises to increase trade barriers on exports from Mexico and China.
Mr. Trump’s strident anti-trade rhetoric has prompted fears that he would precipitate a trade war at a time when global trade is already suffering because of increased protectionist measures in countries around the world.
“This is not ‘Brexit,’” said Jeffrey Kleintop, an investment specialist at Schwab Investments, referring to the rally in stocks and bonds that soon followed Britain’s vote to leave the European Union. “That will be a long process of negotiated change. The worry is that Mr. Trump would follow through on his promise to raise tariffs on China and Mexico.”
In afternoon trading on Wednesday, the benchmark S.&P. 500 index was up about 1 percent.
For now, the market’s willingness to cast a positive eye on a Trump win seems tied to the prospect of more government spending.
In the weeks leading up to the election, a noticeable trend has been the slow but persistent increase in the interest rates of government bonds, many of which have been in negative territory for some time as investors sought safety in these securities.
The yield on the benchmark 10-year United States Treasury breached 2 percent on Monday, a strong rise since rates bottomed out at 1.37 percent in July.
And similar bonds issued by Japan and Germany, which this year began offering negative yields, are creeping toward positive territory.
Analysts have said that these moves reflect a growing willingness of politicians around the world to loosen their fiscal belts as a way to fight against long-term stagnation. Any move toward a meaningful pickup in infrastructure investing would require more government borrowing and thus put upward pressure on today’s rock-bottom interest rates.
Last week, the former United States Treasury secretary Lawrence H. Summers made the case, in a speech at the International Monetary Fund, that with rates at historically low levels and with the increasing chances of the economy entering a recession in the coming years, a move toward more government spending is desperately needed.
“The question of lack of demand should be our preoccupation in thinking about macroeconomic policy going forward,” Mr. Summers said. “And it has a natural solution — issuing debt to support whatever investments the government sees as best.”
Governments around the world that are sitting on large piles of cash, like Germany, are facing similar pressures to take advantage of low rates to borrow and spend to stimulate a more vigorous level of growth.
While such policies would also increase debt levels, economists who support Mr. Summers’s policy prescription argue that a trade-off of higher growth is worthwhile, given how low borrowing costs are right now.
No matter what comes next, the initial reaction Tuesday into Wednesday was shock. As the realization worked its way around the planet that Mr. Trump would become the next president of the United States, global investors tried to make sense of the financial and economic implications, putting markets on edge.
American stocks were higher, a respite from the wild ride in Europe and Asia. But confusion showed no signs of abating, with investors awaiting the articulation of Mr. Trump’s agenda.American stocks were higher, a respite from the wild ride in Europe and Asia. But confusion showed no signs of abating, with investors awaiting the articulation of Mr. Trump’s agenda.
Global investors initially reacted as if the world had caught fire. They yanked their money from the marketplace in an unrestrained bout of selling reminiscent of the outbreak of war.Global investors initially reacted as if the world had caught fire. They yanked their money from the marketplace in an unrestrained bout of selling reminiscent of the outbreak of war.
They sold stocks — first in Asia, and then in Europe. They sold oil and the Mexican peso, pushing it to a record low. Investors sold stocks — first in Asia, and then in Europe. They sold oil and the Mexican peso, pushing it to a record low.
They even sold the American dollar, which nearly always functions as a refuge in times of chaos. Other traditional havens, like gold and the Japanese yen, rose in moves that had all the hallmarks of what traders usually describe as a flight to safety. They even sold the United States dollar, which nearly always functions as a refuge in times of chaos. Yet hours later, the dollar rallied, oil prices recovered and even the Mexican peso came off its lows.
However, as Mr. Trump offered his victory speech in New York — eschewing the crude and divisive rhetoric that has brought him accusations of racism and misogyny in favor of congratulating his vanquished opponent, Hillary Clinton, and calling for unity — the markets began a steady climb back. By midday in London, stocks were roughly where they had begun, though they remained down sharply in Spain, and moderately down in France and Germany.
The dollar had largely recovered its losses. American stocks rose, with major indexes up nearly 1 percent by midday.
Even so, the initial stampede for the exits resonated as recognition that a vast range of policies framing global commerce — from trade to immigration to defense to climate change — were now subject to a potentially radical refashioning.
It is said frequently that what markets crave more than anything is certainty. The world suddenly seems in shortage of that.
The stunning June vote in Britain to abandon the European Union effectively redrew the regional map governing trade, risking a rupture within a marketplace encompassing 500 million relatively affluent people. But a Trump presidency presented the possibility that the whole atlas for international commerce had been torn to bits.
During the campaign, he vowed to renegotiate the North American Free Trade Agreement between Mexico, Canada and the United States. He repeatedly promised to slap punitive tariffs on imports from China, raising the prospect of a trade war between the world’s two largest economies.
Mr. Trump at one point threatened to renegotiate the terms of American debt, effectively raising the prospect of a sovereign default in the epicenter of the global financial system and a loss of confidence in the reliability of the American currency. If faith in the basic sanctity of the dollar cannot be taken as a given, then nearly every crevice of finance is subject to some additional layer of risk — from mortgages to corporate bonds to government debt.
More broadly, Mr. Trump vowed to radically alter a host of agreements made between the American government and significant actors on the global stage, from the Paris accord setting out targets to reduce the pollutants contributing to climate change, to the deal aimed at constraining Iran’s nuclear aspirations. He promised to escalate the battle against the Islamic State, intensifying bombing in Iraq and Syria. He vowed to build a wall along the Mexican border.
Taken as a whole, markets absorbed the looming Trump presidency as a signal that the knowns are now vastly outnumbered by the unknowns — a clear signal to pull their money to the sidelines.
“This is a negative shock for markets,” said Ricardo Reis, an economist at the London School of Economics. “For sure, this is a huge increase in uncertainty. And for the most part, what certainty is available seems bad. Like the Brexit vote, this raises the likelihood that trade deals will be repudiated and borders will be closed.”
In recent weeks, markets around the world largely assumed that the election would be won by Hillary Clinton, a known quantity with a record in public life going back more than a quarter-century.
But as returns emerged Tuesday evening, raising the possibility that two previously unimaginable words — “President Trump” — were on the verge of becoming official nomenclature, markets in Tokyo, Hong Kong, Australia and the rest of the region dropped precipitously, shedding as much as 6 percent of their value by early afternoon.
As trading commenced in Europe, stock markets were down more than 3 percent before recovering slightly. London shares opened down 2 percent before bouncing back.
Stock market futures initially indicated a sell-off once Wall Street awoke. Futures on the Dow Jones industrial average dropped more than 4 percent, and the broader Standard & Poor’s 500-stock index plunged about 5 percent.
But when the American markets opened, stocks showed resilience. Major indexes were up by the middle of the day.
As currency markets fluctuated, they appeared to be functioning as barometers of national prospects in the wildly unpredictable new era unfolding.
The dollar’s initial weakening — it surrendered more than 1 percent on a broad index in Asian trading — was construed as a sign that protectionist policies championed by an incoming Trump administration risked damaging economic growth in the United States.
The Mexican peso fell in an apparent indication that markets assumed Mr. Trump would follow through on his promises to make it harder for American companies to manufacture goods south of the border while selling finished goods in the United States. Eighty percent of Mexico’s exports land in the United States.
The yen rallied against the dollar, as investors sought refuge in the currency. This intensified pressure on Japanese officials, who have often intervened in markets to lower the value of the yen in an effort to bolster exports. Officials from Japan’s Finance Ministry, the Bank of the Japan and the Financial Services Agency met in Tokyo on Wednesday afternoon, with one warning obliquely that the government could intervene in currency markets.
Ironically, Mr. Trump’s victory may have momentarily taken some of the pressure off one of his primary adversaries: the Chinese government.
Though Mr. Trump has in recent months repeatedly accused China of intervening to weaken the value of its currency in a bid to make its exports cheaper on world markets, the reverse has in fact been true: China’s central bank, the People’s Bank of China, has been devoting hundreds of billions of dollars to bolstering the value of the Chinese currency, the renminbi.
China has been contending with money leaving the country, a trend accelerated by assumptions that the United States Federal Reserve will soon lift interest rates. But with Mr. Trump destined for the White House, ratcheting up concerns about economic growth, many analysts now expect the Fed to reconsider. That gives the Chinese central bank less reason to fear a continued exodus of money.
But beyond such immediate concerns, the looming ascent of Mr. Trump to the most powerful office on earth has injected enormous variables into the calculations of those who control money. This appeared to be the message contained within the frenzied selling that accompanied word of his victory.
It remains to be seen whether Mr. Trump will do all he said during his campaign, said Nigel Green, founder and chief executive of the deVere Group, a financial management firm, in a note to clients. “For now,” he wrote, “Trump winning is sending shock waves across the world.”