Global financial and commodity markets are thrashing about for solid footing following Donald Trump’s U.S. presidential election victory as confusion abounds about his economic plans.
On Friday, gold fell 3.4 per cent and U.S. benchmark crude sank 3.2 per cent to a seven-week low, pulling the Canadian dollar down.
Stocks also sank, the S&P/TSX composite index closing down 1.3 per cent.
Bonds staged a sharp sell-off this week, erasing an estimated $1-trillion (U.S.) of value globally, as investors braced for more inflationary pressure and higher interest rates under a Trump administration.
Markets whipsawed in the hours after Tuesday’s surprise election result became clear, with stocks rebounding after an early swoon and some currencies, including Canada’s, weakening against the U.S. dollar.
The volatility shows just how uncertain investors around the world are over the effects of a Trump presidency – and Republican control of the Senate and House of Representatives – after months of anticipation that Hillary Clinton was destined for the White House.
That would have largely meant a continuation of President Barack Obama’s economic and environmental policies.
Now, many of those look set for a reversal, including plans to cut carbon emissions from fossil fuels under the Paris accord and Mr. Obama’s rejection of TransCanada Corp.’s $8-billion Keystone XL pipeline.
Enthusiasm early this week was a function of a clear victory for Mr. Trump rather than a contested result, and a general belief that the Republicans are a pro-business party, said Douglas Porter, chief economist at BMO Nesbitt Burns.
However, Mr. Trump may not be able to go full throttle on the infrastructure spending and job creation he campaigned on, and a more protectionist stance on trade and stronger U.S. dollar could impede exports. Indeed, even some Republicans worry that the promised cut in income taxes could drastically drive up the budget deficit.
“Investors appear to be pricing in the expectation/hope that Congress will keep the most positive aspects of Trump’s proposals (tax cuts) and blunt the most harmful aspects (protectionism). Here’s hoping,” Mr. Porter wrote in a note to clients.
Copper surged this week on a combination of speculative buying in China and wagers that new spending on U.S. infrastructure such as roads and bridges will be enough to drive up demand.
However, the dramatic gains in the metal, and the sliding price of gold, could reverse quickly, according to Capital Economics Ltd. “Commodity markets seem to believe U.S. president-elect Trump will quickly deliver the one thing that he probably can’t – a surge in infrastructure spending – and are ignoring all the bad stuff that perhaps he can,” the consultancy said.
In a vote of confidence on the equity front, Canada’s Fairfax Financial Holdings Ltd. said it sharply reduced its hedges in the U.S. market.
“We believe the U.S. election may result in fundamental changes that may bolster economic growth and business development,” Fairfax chief executive officer Prem Watsa said in a statement. “As a result, there is the potential for a longer-term rally in U.S equity markets that reduces the need for the capital preservation protection of equity hedging.”
In energy, Mr. Trump has pledged to open up federal lands to drilling, while scuppering climate initiatives. He has also said he would undo the nuclear accord with Iran – a deal that has allowed the Organization of Petroleum Exporting Countries member to resume exports after years of sanctions. That could eventually drive up prices if it disrupts Iranian exports, Royal Bank of Canada equity strategist Matthew Barasch said.
But for now, markets are weakening. The cartel meets on Nov. 30 to formalize plans for output quotas, but there are growing doubts about its ability to unite to lift prices.
The International Energy Agency said this week that OPEC production rose for the fifth straight month. It warned that a market rebalancing could be delayed, with 2017 shaping up to be a year of relentless supply growth.
“You can only talk up prices so far for so long,” said Judith Dwarkin, chief energy economist at RS Energy Group in Calgary. “If there isn’t a deal, things for next year look pretty grim. We would expect to see stocks to keep building, just adding to the massive stockpile that’s already been accumulated in the past two years.”Report Typo/Error
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