rapid reaction of the markets inside and outside the country, what is expected for the future?

rapid reaction of the markets inside and outside the country, what is expected for the future?

Another highly divisive American election cycle brought Donald Trump back to the White House, defeating Kamala Harrisjust as prediction markets have been suggesting for some time. In addition, Republicans regained the Senate, winning more than 50 seats, and are making good progress in the race for control of the House of Representatives, although it is still considered too close to issue a definitive forecast, according to most analysts.

This result is expected to lead to more stimulus for the US economy, although the magnitude of this will depend on whether the Republicans manage to have full control of Congress.

As expected, after such a major event, the markets reacted quickly. Futures suggest the S&P 500 will open up more than 2%, while the NASDAQ will rise 1.7%. However, the most notable indices in the US market are the S&P Midcap 400 and Russell 2000, where futures show increases of more than 4% and 5% respectively.

This is not surprising, given that Republicans will likely seek to maintain the current tax cuts and pursue further tax reforms. Perhaps most surprising so far has been the strength of markets outside the US. European and Japanese stocks are performing well, and the decline in the Chinese economy appears to be less pronounced than many feared, despite the president-elect’s threats regarding global trade.

The super dollar

From Janus Henderson We see the US dollar showing strength on all fronts as markets consider the potential impact of more import tariffs and have largely discounted further rate cuts from the Federal Reserve. US Treasury yields have risen sharply, both due to evolving interest rate expectations and the possibility of higher inflation.

Now markets will likely begin to focus on how rhetoric translates into policy, with every pronouncement made in the coming months being scrutinized for clues. With the general view that both parties would continue to run fiscal deficits, it seems likely that the US economy will continue to be driven by the “rush” of fiscal stimulus.

The impact this will have on the Federal Reserve may take some time to become clear, as the Federal Open Market Committee (FOMC) will be reluctant to make decisions until there is greater clarity on policy. Markets will have to wait to see if the Federal Reserve is willing and able to rein in an overheating economy.

DonaldTrump (REUTERS)2.jpg

The soft landing seems to be reflected in prices.

Courtesy REUTERS

The US economy has performed well, as evidenced by 2.8% annualized growth in the third quarter and a continued streak of positive data. However, with the prospect of fewer interest rate cuts, bond markets, already concerned about the US debt mountain and rising long-term bond yields, need to be cautious: the “high rates for longer” scenario could become a problem for the economy.

The soft landing appears to be reflected in prices, but there are cracks in some areas of the economy that could widen if rate cuts do not materialize to a sufficient degree. For the moment, however, markets are focused on the benefits of post-election certainty and the prospect of pro-growth policy.

Portfolio Manager at Janus Henderson

Source: Ambito

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