Republican candidate Donald J. Trump has claimed victory in the November 8 US presidential election, and the Republican Party has secured both houses of Congress. Though many polls reflected a tight race, the result was a surprise for markets. The initial reaction included a drop in the S&P futures index, weakening in the Mexican peso versus the US dollar and rallies in assets that have traditionally performed well in periods of volatility, such as the Japanese yen, Swiss franc, US treasuries and gold. The following is a summary of our positioning and key takeaways for our strategies in fixed income and currency markets.
- We think the election result may discourage the Federal Reserve (Fed) from raising interest rates in the near term. Increased expectations for the Fed to remain on hold in December are likely to drive US short-term rates lower.
- We believe spreads will remain under pressure as the market digests this outcome and what it means for policy. If tighter financial conditions lead to a slowdown in the US economy, we expect pressure on corporate revenues and earnings.
- Heading into the election we were short the dollar versus emerging market currencies, including the Mexican peso. The peso position was based on our fundamental view that the currency is undervalued and would likely benefit from improving US growth. In sizing the position we were mindful of the likelihood of increased volatility should Trump win the election.
