As the hangover from the American election passes, financial markets are showing growing signs of stability as volatility ebbs. While the overnight session was dominated by a deeply gloomy outlook for the United States, causing a dramatic selloff, the subsequent bounce back in risk assets shows that the plunge was overdone. Overall, the ascension of Donald Trump to president-elect is not necessarily the worst case scenario for the American economy. While Wall Street and corporate multinationals may be running for cover, main street America is likely to benefit from the developments. Plans to reduce corporate taxes and simplify personal income taxes are great steps towards repairing an anti-competitive environment and bloated regulatory atmosphere. The unveiling of a $1 trillion infrastructure spending plan will also help repair a crumbling domestic economy that has not effectively recovered from the last financial crisis. Even though the kneejerk reaction to news caused fear and other anxious reactions, as the Brexit referendum showed us, there is no reason why an economy cannot emerge stronger from a political shift.
Since the referendum vote, the UK manufacturing and services sectors have strengthened dramatically. Furthermore, a weaker Pound has actually increased the competitiveness of the economy. Should the US dollar fall in kind, it could be very positive for US industry and manufacturing. Trade would also undoubtedly benefit. While markets priced a very negative outcome from a Trump victory, the truth is that greater trade protectionism is likely to bring jobs back to America. While the market panic was an obvious over reaction, nearly all losses in risk assets have since faded. After spiking as high as 1.2546 as the votes were tallied, GBPUSD has nearly given back all earlier gains, trading flat on the session. Markets will now turn their attention towards the important December Federal Reserve meeting to see if the Central Bank is finally ready to continue down the path of policy normalization. Should rate hike speculation continue to rise, US dollar momentum will likely follow to the upside in-kind over the coming days and weeks.
The US Presidential Elections - Day After
Market Trends - 09/11/2016