Market Views: Fixed Income
How the market reacted to the US election: Four essential charts explained
Following Donald Trump’s victory in the US presidential election we look at the performance of gold, US healthcare stocks, the dollar and the volatility index to gauge the market’s reaction.
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The US election is another potential inflection point for markets in what has been a turbulent 2016.
We look at four essential charts: gold, the S&P 500 healthcare index, the dollar and the volatility index and explain how they reacted to Donald Trump winning the race for the White House.
The election result triggered a rise in the price of gold. Uncertainty surrounding Trump’s policies and their potential implications for the US and the global economy has caused some investors to seek protection.
Gold is considered a “safe haven”, a store of value in times of turbulence.
Healthcare stocks began to recover ahead of the final election result, potentially signalling that the market was aware that Trump could win the election.
The healthcare sector is the easiest chart to explain. Put simply, Hilary Clinton’s policy towards healthcare in the US was to expand the Affordable Care Act (also known as Obamacare), which could have been potentially costly for pharmaceutical giants.
Trump has said he will repeal it, which could help the profitability of drug companies.
The dollar is the world’s “reserve” currency. Commodities are priced in dollars and most of the world’s major deals are struck in dollars. It is also considered a safe haven, to some degree, during uncertain economic times.
Initially, the dollar fell sharply. This, in part, was due to the reduced chance of a US rate rise in December, which had been widely expected. Later in the day, the dollar regained poise. By 12.45 GMT, the dollar was down just 0.2% on the day against a basket of major currencies.
Johanna Kyrklund, Global Head of Multi-Asset Investments at Schroders, said: “The US dollar has weakened and that is good news because it alleviates pressure on the US economy. Ironically it also helps the emerging markets where, in many cases, their currencies are pegged to the US dollar.
“Overall, there are a lot of implications to process over the medium-term but in the short-term we think the US dollar could act as a shock absorber as investors price in higher political risk.”
The Mexican peso, which has been impacted by Trump’s comments during the campaign, fell to its lowest level against the dollar since the financial crisis in 2008, falling by more than 10% in the hours after the result was confirmed.
The yen, in contrast, gained strongly after the result. The Japanese currency, an alternative currency safe haven, has been rising against the dollar since the start of the year. It rose nearly 4% against the Japanese currency before later giving up much of the gains.
The VIX, otherwise known as the fear index, is a gauge of investor sentiment. If the index is rising it suggests that investors are preparing themselves for a market-moving event.
Having dipped a few days before the election the VIX was on the rise again following the result. The index remains below Brexit highs of late June, however, signalling a more measured response from investors.