The election of Donald Trump as the 45th president of the United States (US) came as a surprise to many, and financial markets roiled in response to the result. The market responded in much the same way it had to the Brexit vote in June, as international investors fled risky assets and scampered to safe havens in an initial knee-jerk reaction.

The unexpected outcome unleashed heightened volatility across all sectors of the global financial markets overnight, resulting in the NIKKEI 225 Index plunging 5.4 per cent. S&P 500 futures initially plummeted by 4.7 per cent, but fully recovered all of their losses in the morning. Across major commodity groups, precious metals rallied on the news, with copper, silver, and gold all increasing in value by about 2.5 per cent.

The fall-off in risky assets suggests expectations of negative implications of a Trump presidency on policy, inflation, free trade, and consequently global economic activity.

Issuers of financial assets that rely heavily on international trade, including airlines, felt the brunt of the negative investor sentiment on expectation that the US would be pursuing a more nationalistic economic policy going forward.

Moreover, the markets are weighing in on the impact of increased political risks given renewed tensions over globalisation, anti-integration movements, and the rise of protectionist rhetoric across the globe which threaten a sustained world recovery.

REPUBLICAN CONTROL

The degree to which the president of the United States’ political party has control over the House of Representatives and Senate often determines his or her political strength — such as the ability to pass sponsored legislation, ratify treaties, and have Cabinet members and judges approved.

With the Trump victory, Republicans kept control of the House of Representatives and hung on to their majority in the US Senate. In some respect, this can be viewed positively on the assumption that one-party control in Washington will bring an end to the incessant gridlock and lead to reflationary fiscal policies.

That said, there is a high degree of uncertainty surrounding how Trump’s position on greater restrictions on trade and immigration espoused during his campaign will translate into policies, given that he was largely short on details surrounding his proposals.

As such, until more clarity is available regarding Trump’s legislative priorities and policies, investors will likely continue to approach the markets with caution, safe-haven assets will continue to outperform, and volatility will remain high.

FED LIKELY TO REMAIN ON HOLD

With policy uncertainty a major concern, there could be some negative impact on consumer spending activity and economic growth, which the US Federal Reserve will want to guard against.

Given the unusually wide range of possible economic scenarios that could play out, the Fed will likely adopt a “wait and see” approach before it makes its next rate move.

As such, despite the fact that the probability of a rate lift has increased to over 80 per cent, as gauged by market expectations, the Fed may decide to hold strain until financial market volatility settles. This will help to support global bond prices in the near term.

We note, however, that with investors seemingly in risk-off mode, the tolerance for lower-grade securities has decreased and as such, we continue to recommend that investors gravitate to investment-grade debt issues.

FIXED INCOME STRATEGY UNCHANGED

As was the case of Brexit, the sell-off of risky assets may turn out to be an initial knee-jerk reaction and the markets could fully recover in the near term. The rebound would be especially strong if central banks around the world, including the Fed, signal intention to maintain an accommodative stance for as long as it takes for them to be convinced about the economic recovery, and for the financial markets to settle.

As such, the decline in risky assets provides an opportunity for risk-seeking investors to pick up stocks at more reasonable valuations. We are maintaining our fixed-income strategy which focuses on issuers with strong fundamentals and investment-grade securities. Investors are also encouraged to focus on shorter tenure bonds which are less sensitive to price risk.

Simone Hudson-Bernard is manager, Research & Structured Products at NCB Capital Markets Ltd.