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World Markets’ Plunge Signals Investors’ Doubts About Trump
(about 1 hour later)
The victory for Donald J. Trump in the American presidential election sent global financial markets plunging on Wednesday, as Wall Street futures tumbled as much as 5 percent and stocks in Asia and Europe sold off sharply.
As the realization worked its way around the planet that Donald J. Trump will become the next president of the United States, global investors 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 or a major terrorist attack.
Investors reacted in real time to early results and predictions showing unexpected gains for Mr. Trump in battleground states, as he edged closer to his shocking upset.
They sold stocks — first in Asia, and then in Europe, with New York trading set for a fall as well, according to the futures markets. 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, but suddenly seemed like a green piece of paper issued by a government seized by insurrection.
Stock market futures pointed to a sell-off looming on Wall Street, with futures on the Dow Jones industrial average poised to open lower by more than 2 percent. . Futures on the broader Standard & Poor’s 500-stock index fell by the 5 percent limit before recovering somewhat.
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. But the dollar’s decline underscored a stark new reality: This time, very little seemed safe.
Markets in Tokyo, Hong Kong, Australia and elsewhere in the region all fell sharply as the Asian trading day came to a close. Markets in London, Frankfurt and Paris opened down more than 2 percent on Wednesday morning. The dollar weakened broadly.
As Mr. Trump offered his victory speech in New York — eschewing the crude and divisive rhetoric that has brought him accusations of racism, misogyny and recklessness — markets pared some of their losses. But the ink was still decidedly red.
Oil futures fell sharply as investors worried about the impact of new trade friction on global economic growth. Gold, popular among some investors during uncertain economic times, staged a rally.
The 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.
Markets around the world had mostly priced in a win by Hillary Clinton, the Democratic nominee, in recent weeks, in line with most data-based prediction models. But as the election results trickled in, most models swung from predicting a victory for Mrs. Clinton to predicting one by Mr. Trump, the Republican candidate, prompting the sell-off on new uncertainty.
It is said frequently that what markets crave more than anything is certainty. The globe suddenly seems in dire shortage of that.
“Markets are buckling and will continue to,” Richard Dunbar, senior investment strategist at Aberdeen Asset Management in Edinburgh, said on Wednesday. “Most investors had calculated that Clinton would win, and markets are now recalibrating — along fairly predictable lines. There’s a natural flight to quality, with assets such the Japanese yen and gold climbing.”
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.
In Japan, economic officials convened an emergency meeting in response to the swings in financial markets. The Nikkei stock average closed down more than 5 percent while the yen — considered a safe haven by some investors — climbed as much as 3 percent against the dollar.
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.
Masatsugu Asakawa, a deputy minister in the Finance Ministry in charge of currency policy, warned obliquely that Japan could intervene in the market to prop up the yen, as it has done in tumultuous moments in the past.
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.
“We are watching market movements closely,” he told reporters after meeting counterparts at the central bank and the Financial Services Agency. “If speculative moves of the sort we are currently seeing continue, we will take the necessary steps.”
More broadly, Mr. Trump vowed to radically alter a host of agreements made between the American government and significant actors on the globe 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.
Given that the polls were still fairly close before the elections, a Trump victory would not come as a complete surprise, “but it’s still a big shock,” said Shane Oliver, the head of investment strategy and chief economist at AMP Capital in Sydney, Australia.
Taken as a whole, markets digested 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.
“Share markets across the Asian region have sold down heavily as investors worry in particular that his protectionist policies will kick off a trade war and depress growth,” Mr. Oliver said.
“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.”
Trading seesawed, tracking live election returns for battleground states like Florida and Ohio as they swung toward Mr. Trump.
In recent weeks, markets around the world had largely assumed the election would be won by Hillary Clinton, a known quantity with a track record in public life going back more than a quarter century.
“We’ve seen reactions to swings back and forth from Hillary to Donald,” Stephen Innes, a senior currency trader at Oanda in Singapore, said in a phone interview, referring to the nominees, Mrs. Clinton and Mr. Trump.
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 Asia dropped precipitously, shedding as much as 6 percent of their value by early afternoon.
Mr. Trump’s policies have also irked America’s biggest trading partners. For example, his bold threats to impose steep punitive tariffs on imports from China have raised concerns among leaders in Beijing. But they could also complicate monetary policy making in the United States.
As trading commenced in Europe, stock markets in Germany, Spain and Italy were all down more than 3 percent. London shares opened down some 2 percent, but then recovered somewhat.
“A Trump presidency means a weaker dollar, and a higher likelihood the Fed would delay a rate hike in December,” said Julian Evans-Pritchard, China economist at Capital Economics in Singapore.
Stock market futures indicated an almost-certain 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 by about 5 percent, though both gained back some ground after Mr. Trump’s victory speech.
But that could also relieve some of the pressure on China’s currency, which has weakened to six-year lows this year in the face of steady outflows.
As currency markets fluctuated, they appeared to be functioning as barometers of national prospects in the wildly unpredictable new era unfolding.
Mr. Trump in recent months has repeatedly accused China of intervening to weaken its currency. But this is not correct. Instead, China’s central bank, the People’s Bank of China, has been spending hundreds of billions of dollars of its foreign reserves to prevent the renminbi from weakening. Mr. Evans-Pritchard said a win by Mr. Trump and the resulting weaker dollar “also takes some pressure off” China’s central bank.
The dollar weakened broadly against many major currencies, surrendering more than 1 percent on a broad index in Asian trading. Economists construed that as a sign that markets expect that protectionist policies championed by an incoming Trump administration will damage economic growth prospects in the United States.
Other financial market investors appeared to be waiting to see the impact of actual policy changes.
The Mexican peso fell in an apparent indication that markets assume Mr. Trump will 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. Some 80 percent of Mexico’s exports land in the United States.
The impact of a Trump presidency is “hard to predict,” said Hugh Young, the managing director and co-founder of Aberdeen Asset Management Asia. “Nerves might cause a sell-off, but we need to await the reality of the U.S.’s policy moves, and that will take time.”
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 it could intervene in currency markets.
The steep sell-off on Wednesday followed a spell when investors around the world appeared to have been on edge over the United States election.
Ironically, Mr. Trump’s victory may have momentarily taken some of the pressure off one of his primary adversaries: the Chinese government.
In recent weeks, in tune with what appeared to be the improving fortunes of Mr. Trump, the markets took on a darker tone as retail investors pulled money out of equity funds and institutional players unloaded some of their riskier investments such as high-yield bonds.
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 toward bolstering the value of the Chinese currency, the renminbi.
Last week, for example, investors pulled $3 billion out of junk bond exchange-traded funds, the largest weekly outflow all year.
China has been contending with money leaving the country, a trend accelerated by assumptions that the American 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.
“Key will now be whether or not Trump will prove to be a populist or a pragmatic president,” said Valentijn van Nieuwenhuijzen, the chief strategist and head of multi-asset investing at NN Investment Partners in Amsterdam. “Still, even a more pragmatic approach will only become visible after some time and the near-term outlook is therefore clouded with geopolitical uncertainty.”
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.
The prospects of a Trump victory seemed to brighten after James B. Comey, director of the Federal Bureau of Investigation, told Congress on Oct. 28 that the agency was examining newly discovered emails from a laptop computer belonging to the estranged husband of a top aide to Mrs. Clinton. Stocks slumped after the news. For the next nine trading days, stocks closed lower, the first such losing streak since 1980.
It remains to be seen whether Mr. Trump will do all he said during his campaign, said Nigel Green, founder and chief executive officer of deVere Group, a financial management firm, in a note to clients. “For now,” he wrote, “Trump winning is sending shock waves across the world.”
On Monday, stocks rallied after Mr. Comey said the emails warranted no further action from the F.B.I. The Standard & Poor’s 500-stock index closed 2.2 percent higher and edged up 0.4 percent on Tuesday.
Over the last three months, the S. & P. index was down 2.5 percent, while the price of gold, traditionally seen as a safe harbor in uncertain times, was up almost 3 percent.
The Chicago Board Options Exchange Volatility Index, or VIX, Wall Street’s so-called fear gauge, rose in late October to its highest levels since the market turmoil that followed Britain’s vote to leave the European Union in June.
The Mexican peso has experienced the brunt of the market’s ups and downs related to Mr. Trump. While the peso has lost 10 percent of its value against the dollar over the last year, the swings have been wild.
Whenever Mr. Trump gained ground against Mrs. Clinton, the currency would plunge up to 7 percent against the dollar, only to snap sharply back as Mrs. Clinton pushed ahead. Some 80 percent of Mexico’s exports go to the United States, and the peso is one of the world’s easiest currencies to trade, making it a popular gauge of market sentiment regarding Mr. Trump’s chances.
The Mexican central bank said it would hold a joint news conference with the Finance Ministry at 8 a.m. Eastern as the peso weakened sharply against the dollar in trading in Asia on Wednesday.
The dollar has gained on the pound since Britain’s vote to split from Europe, while it has remained flat for the year against the euro and the yen.
On Wednesday, the pound reached its highest level against the dollar in a month before giving back some of those gains, while the euro also strengthened against the dollar.
“The Brexit result was a real shock and created instability” in Britain, said Nigel Green, the founder and chief executive of deVere Group, a financial consultancy. “But this is a far bigger deal as this creates instability on a much wider, international scale.”
“The markets’ main concerns include Trump’s protectionist policies, focusing on potential trade wars with China – America’s largest trading partner – and with Mexico, it’s third largest,” he added.
But perhaps the most noticeable trend of the last few months 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.
The yield on the benchmark 10-year United States Treasury note rose to 1.86 percent on Tuesday from a low of 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 suggest that this trend may well reflect nascent signs in the developed economies of inflation and increased economic activity.
A view is also taking hold that the next president of the United States is going push hard for an increase in government spending as a way to spur what has been a stagnant economic recovery, and both candidates have spoken out in favor of such an approach.
Any move toward a meaningful pickup in infrastructure investments would require more government borrowing and thus put upward pressure on today’s rock-bottom interest rates.
Last week, Lawrence H. Summers, the former United States Treasury secretary, 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, 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, Germany for example, 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.
