Markets take bets on what Donald Trump will change

Sterling gained ground against the dollar and the euro, as markets continued to sift through the potential implications of Donald Trump’s surprise victory in the US presidential election.
Markets take bets on what Donald Trump will change

The uncertainty generated by Mr Trump’s win after a campaign that included a wide range of potentially disruptive policy pledges — from building a wall with Mexico to declaring China a currency manipulator — threatens to provide a different set of impulses for the UK currency over the next few months.

A number of banks have now said they expect the dollar to strengthen next year on the back of higher US yields and inflation, which would put more pressure on the pound’s dollar value as London starts formal talks on an exit from the EU.

If Mr Trump’s victory foreshadows more victories for populist politicians in Europe next year, that may also give Britain more cover from the politically-driven selling that has hurt sterling since the Brexit vote in June.

Irish-based analysts have long said that the euro surge against sterling this year could be stopped in its tracks, on the outcome of key national elections in France and Germany in 2017.

“Trump in the White House will help the pound,” said Derek Halpenny, European head of global market research at Bank of Tokyo-Mitsubishi UFJ in London.

“The UK Brexit vote will no longer be viewed as some kind of outlier vote but perhaps the beginning of a global shift towards more populist voting.

“The fall in the euro should then be viewed as a sign of a shift of the political risk premium from the UK to Europe.”

Sterling gained to 86.8p against the euro in London trade yesterday. However, indicators show investors are still betting massively on sterling weakness.

Positioning readings showed short positions close to their highest on record. “I think the market is going through a period as it did after Brexit.

“We have the initial reaction and then doubt over whether he [Trump] will do all the things he said he would do,” said Dominic Bunning, strategist at HSBC in London.

In London, mood of stock markets “darkened considerably”, Chris Beauchamp, chief market analyst at online trading firm IG said.

Nonetheless, shares in European banks got a second-day boost on speculation Mr Trump’s term will lead to increased inflation and an easing of financial rules.

UBS and Credit Suisse, which get more than 35% of their revenues from the Americas, led the rally that pushed Europe’s banks to their best four-day jump since July.

The biggest Swiss lender surged the most since 2011, while Credit Suisse jumped 4.9%.

Europe’s banks, which until recently were among the year’s worst-performing group in Europe, are bouncing back as bond yields rebound from their summer lows, easing concerns over profitability.

Mr Trump’s victory added to the optimism, with his promises of public spending fuelling bets for higher inflation, while speculation grew that he will review the strict capital rules applied during Barack Obama’s administration.

German debt reached a six-month high.

“It’s a favourable phenomenon for banks when they do not have yield curves with negative rates,” said Pierre Mouton, a fund manager at Notz, Stucki & Cie in Geneva, referring to the difference in yields between short- and long-dated bonds, which lenders profit from.

Reuters, Irish Examiner and Bloomberg

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