Hasenstab: US Election Rhetoric vs. Realities

As the election results were confirmed late Tuesday night in the United States (around midday Wednesday in Asia), we had a pretty violent reaction in many markets and across asset classes and regions. Interestingly, as soon as Europe’s day began, and then followed by the start of the regular US trading day in New York Wednesday morning, we saw a very interesting bifurcation. Many of those initial panics were completely reversed and some began moving in the opposite direction.

US Treasuries initially experienced a knee-jerk reaction to the victory for Donald Trump , where yields fell and bond prices rose. Very quickly those gains reversed and as the trading day began to unfold, we saw the 10-year Treasury note yield rise above 2%, approximately 20 basis points wider than where it was trading just a few days ago.1

I think this is very important as it tells us two things. First, when there is a shock to markets, the most vulnerable assets are the ones that are in a bubble, and we have been saying for quite some time that US Treasuries appear to be overvalued. I wouldn’t have necessarily predicted the election to be the trigger to begin to correct the situation, but when shocks happen, markets that are distorted will tend to react most violently and I think US Treasuries have demonstrated that.

Second, when we think through the possible implications of some of Trump’s proposals which have to do with increasing tariffs, the most immediate implication is increasing prices—which is inflation. So, I think the reaction in Treasuries today reflected two aspects: They were in a bubble that was shocked, and there is some concern the US election outcome will only exacerbate the rising inflationary pressures that were already happening.

Global Market Implications

Turning to the global market implications, we first saw the Japanese yen and the euro appreciate significantly when the US election results came in, but then retraced all of their gains. By the early hours of the East Coast US time zone, they were actually trading at a loss. These markets were reacting to rising US Treasury yields as we would expect them to.

In emerging markets, we’ve seen a couple different initial dynamics taking place in the wake of the US election results. Many of the Asian markets that had initially declined fully or partially retraced those losses; India’s market actually ended stronger than it started the day and Indonesia saw a large retracement. Elsewhere, Latin America was obviously more severely affected given some of the pre-election rhetoric from Trump.