Market Turmoil Following Trump's Election Win: A Bloodbath Across Currencies, Tech, Bonds, and Banks

Market Turmoil Following Trump's Election Win: A Bloodbath Across Currencies, Tech, Bonds, and BanksNovember saw the election of former US President Donald Trump, and his so-called "Trump trade" bearish for assets impacted by tariffs, such as European exporters and the Mexican peso, while boosting flows into US equities and the dollar was initially validated. However, December may bring volatility as the "Trump trade" is vulnerable to a bond market rebound, while tariffs could fuel inflation and disrupt supply chains

Market Turmoil Following Trump's Election Win: A Bloodbath Across Currencies, Tech, Bonds, and Banks

November saw the election of former US President Donald Trump, and his so-called "Trump trade" bearish for assets impacted by tariffs, such as European exporters and the Mexican peso, while boosting flows into US equities and the dollar was initially validated. However, December may bring volatility as the "Trump trade" is vulnerable to a bond market rebound, while tariffs could fuel inflation and disrupt supply chains. BCA Research noted that "(US) equity valuations are stretched, reflecting market complacency as the more challenging environment we anticipate is not yet priced in." This warning foreshadowed potential sharp market swings across a range of assets due to Trump's policies.

Currency Markets: Euro Leads the Decline, Volatility Intensifies

In November, the euro fell more than 3% against the dollar, its worst monthly performance since early 2022, dipping to around 1.05. This decline was primarily driven by US tariff risks, political instability in Germany and France, and a sharp downturn in regional economic activity. Analysts predict further increases in volatility in the $7.5 trillion-a-day currency market as debate intensifies over how much further the euro can fall and the impact of Trump's policies on the global economy. The Mexican peso fell over 1% against the dollar in November, and the British pound dropped nearly 2%. Nick Rees, senior market analyst at Monex Europe, pointed out, "The key question for the FX market is whether Trump's victory signals a fundamental structural shift in the global economy, or whether the market is simply undergoing a knee-jerk panic reaction?" This question highlights the uncertainty surrounding future market movements.

Bitcoin: Boom Conceals Risks

In contrast to the downturn in other assets, Bitcoin performed exceptionally well in November, surging 37% and briefly approaching the $100,000 mark. This was largely attributed to expectations of a more favorable regulatory environment for cryptocurrencies under a Trump administration, and a continuation of the massive influx of funds into US spot Bitcoin ETFs that began in February. However, Bitcoin's future trajectory remains divisive. Some believe a break above $100,000 would mark its eventual transition into a mainstream investment. Dan Coatsworth, investment analyst at AJBell, stated, "If Bitcoin breaks through $100,000 then more people are likely to look at cryptocurrencies." Others, however, warn of excessive speculation, suggesting Bitcoin's surge could be followed by a sharp fall, resulting in investor losses.

Tech Stocks: Double Pressure from Tariffs and AI Bubble

The Nasdaq 100 index enjoyed its best monthly gain since June, buoyed by Tesla's strong performance (a 33% monthly increase) and the ongoing artificial intelligence boom. However, Trump's tariff plans threaten tech stocks' supply chains, and the surge in spending by hyperscale companies (such as Microsoft, Meta, and Amazon) on AI has raised investor concerns. Mikhail Zherev, fund manager of Amati Global Investors' innovation fund, commented, "There's a fierce 'arms race' between major hyperscalers that may have over-invested. We've reduced our exposure (to AI)." The European Central Bank also warned that a bursting AI "bubble" would have "negative global spillover effects," significantly impacting global equity markets.

Banking Sector: US-Europe Divergence, Hidden Risks

The US bank index soared 13% in November, its best monthly performance in a year, driven by expectations of deregulation under a Trump administration. European banks, however, underperformed, falling 5% during the month, primarily due to a weak Eurozone economy and expectations of interest rate cuts by the European Central Bank. Despite European banks rising 16% year-to-date (largely due to relatively high loan rates), a JPMorgan report indicated that hedge funds were still net sellers of European bank stocks. Deutsche Banks report highlighted the industry's need to strengthen fee activities in asset and wealth management, as well as trading and investment banking, to meet the challenges.

Bond Market: Divergence Emerges

November may have marked the start of a divergence in major bond markets (which typically move together). The 10-year US Treasury yield showed little change at the end of November compared to the month's start, but the main direction still appears upward. Strong economic data and anticipation of higher inflation and fiscal deficits under Trump's policies have pushed the yield up 60 basis points since mid-September. Capital Economics forecasts a rise to 4.5% by year-end from its current level of around 4.24%. In contrast, the 10-year German Bund yield fell over 20 basis points during the month, to around 2.15%, its biggest monthly drop in 2024, due to weak economic activity, Trump's tariff threats, and the escalating conflict in Ukraine. Japan saw a different picture, with its 10-year government bond yield posting its biggest monthly gain since May, partly due to the yen's fall following Trump's win, fueling speculation of a rate hike next month.

In conclusion, the market reaction to Trump's election win was complex and multifaceted. While the "Trump trade" initially played out, tariffs, inflation, geopolitical risks, and potential asset bubbles cast a shadow over future market trends. Currency market volatility intensified, tech stocks faced double pressure, a clear divergence emerged between US and European banks, and the bond market also showed signs of divergence. Investors need to closely monitor these factors and exercise caution in response to potential market risks.