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The expectations surrounding interest rate hike by the United States Federal Reserve in its December monetary policy meeting has witnessed steep drops following the victory of Republican candidate Donald Trump in the 2016 U.S. Presidential election that revealed results today.
The negative reaction in financial markets to expectations of Donald Trump’s victory in the Presidential election clearly reflects enormous uncertainty. The uncertainty also reflects anxiety about Trump’s inexperience in public office, his foreign policies, especially given current tensions in the Middle East, a promise to build a wall along the border with Mexico, tighter immigration (deporting 11 million illegal immigrants), and a promise to materially boost military spending.
Republicans typically tend to be fiscally conservative and support deficit reductions and small government, so this may lead to potential clashes with Congress and influence whether or not.Trump will be able to implement his tax plans. A central plank of his economic policy is to cut corporate taxes from 39 percent to 15 percent, simplifying the income tax structure.
Although markets moved sharply as the results unfolded and now seem to be trying to backfill some of the moves, it is plausible that given the uncertainty, these trends may run further in coming days and weeks. Safe haven assets, therefore, could remain bid (FI, EUR, JPY, CHF, etc. and high beta currencies could underperform) as the market tries to assess an appropriate risk premium for a Trump presidency, ANZ reported.
Markets will now wait to watch what Donald Trump will clarify as policy and whether emotive election rhetoric will be toned down. It will also be very important to monitor who he appoints to key offices in Washington.
Meanwhile, the landscape may change once policies actually become defined and it could be the case that expectations of lower taxes and lower regulation could be seen as positives for US growth. However, should consumer confidence and spending get a boost from the election result, the aggressive revision to expectations for a December rate increase may be overdone.
