Trump win sends markets into parallel realities

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07/11/2024 13:00

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Francesco Guerrera
       LONDON, Nov 6 (Reuters Breakingviews) - Welcome to the
pick ’n’ mix market. Donald Trump’s surprisingly clear victory
in the U.S. presidential election has sent investors rushing
into parallel, but clashing, realities.
    Domestic stocks, crypto assets and the dollar all leapt on
Wednesday, lured by the prospect of the Republican candidate’s
promises of tax cuts, deregulation and continued strong growth.
Bond investors, meanwhile, focused on the fears of a fiscal
meltdown caused by some of the same policies. Overseas stock
markets and currencies took cover but didn’t panic. The
short-term moves make sense in the aftermath of the vote. But in
the long run, these convenient truths will give way to a more
nuanced, and scary, reality.
    Both the S&P 500 Index  .SPX  and the Dow Jones Industrial
Average  .DJI  rose to record highs at the open while the
Russell 2000  .RUT , which comprises smaller companies, was
close to a near-three-year high. Trump’s second term holds the
promise of tax breaks, deregulation that makes deals easier and
business-friendly courts. Shares in financial groups Capital One
 COF.N  and Discover  DFS.N  gained on hopes that the new
administration may look more favourably on their planned merger.
So did supermarket operators Kroger  KR.N  and Albertsons
 ACI.N . Bitcoin, the risky asset par excellence, touched an
all-time peak of close to $75,000.
    Yet while investors were willing to price in some of Trump’s
mooted policies, they paid less attention to others, such as his
threat to impose 20% tariffs on all imports, with levies of 60%
on Chinese products. Shares in artificial intelligence darling
Nvidia  NVDA.O  rose, even though the new President’s pledge
would increase the price of imported chips made by Taiwan’s TSMC
 2330.TW .
    While equities and crypto were exhibiting animal spirits,
bonds were displaying a more human trait: anxiety. Yields on
30-year U.S. government bonds rose from 4.42% to more than 4.6%.
In mid-September, they were below 4%. Fixed-income investors
fear that tariffs, tax cuts and spending will fuel inflation and
make the country’s bad fiscal situation even worse: the budget
deficit is already a hefty 7% of GDP while federal government
debt is 99% of GDP. A fiscal splurge will force the Federal
Reserve to keep interest rates elevated. It could even cause a
full-blown debt crisis.
    For a while, the two trends – buoyant risky assets,
depressed bonds – can coexist, not least because investors in
equities have much shorter time horizons than the fixed-income
types. If Trump keeps his word and unleashes a protectionist
wave coupled with loose fiscal policy and corporate
deregulation, it will be hard to avoid a debt reckoning or at
the very least a prolonged period of above-average inflation.
Eventually the conflicting market realities will clash.
    
    Follow @guerreraf72 on X
    
    CONTEXT NEWS
    Wall Street’s main equity indexes soared to new highs on
Nov. 6 after Republican candidate Donald Trump won the U.S.
presidential election. The benchmark S&P 500 Index of large U.S.
companies was more than 2% higher at 1530 GMT. The Russell 2000
Index, which includes smaller companies, jumped nearly 5%.
    However, U.S. government bonds sold off sharply amid fears
that Trump’s promise of draconian trade tariffs and fiscal
splurges will lead to ever larger deficit and debt burdens.
Yields on the benchmark 10-year U.S. government bonds touched
4.453% at 1038 GMT, the highest level since July.

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Yields on long-dated US debt surged after Trump's win    https://reut.rs/3NYHXsu
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 (Editing by Peter Thal Larsen and Pranav Kiran)
 ((For previous columns by the author, Reuters customers can
click on  GUERRERA/ 
francesco.guerrera@thomsonreuters.com))