Payson F. Swaffield, Chief Income Investment Officer, Eaton Vance says that in less than 24 hours after becoming president elect, Donald Trump has managed to accomplish what global central bankers have struggled to do: increase inflationary expectations.
“Apart from the major fiscal stimulus during the financial crisis in 2008, global central banks have been the only game in town, in terms of keeping a lid on global rates, providing liquidity and boosting prices of financial assets, yet depriving the markets of their important price-discovery mechanism.
“Overnight, the Trump victory has changed this, adding an important new element for the markets to digest, and letting them act like markets again.”
Trump’s path to victory included promises of debt-financed fiscal stimulus and protectionism – both of which have the potential to boost inflation, especially since he will have a Republican Congress presumably willing to be on board.
Reaction by the financial markets posed an interesting contrast to the aftermath of the Brexit vote last June. Risk assets like stocks and high-yield bonds fell sharply after Brexit, and took roughly a week to recover. S&P 500 futures took a comparable dive on Tuesday night as the surprising election results began to take shape, and this morning high-yield bonds opened up about 1 ½ points lower than yesterday’s close as measured by the BofAML US High Yield Index.
By mid-afternoon today (Wednesday), the S&P 500 was up over 1.0% and high-yield bonds had recovered most of their losses. At the same time, 10-year U.S. Treasury yields spiked by 20 basis points to just over 2%, the highest level since January. The breakeven rate for 10-year TIPS -a gauge of expected annual inflation – advanced from 1.74% at Monday’s close to 1.86%, up from a seven year low of 1.21% in February of this year. In combination with the rebound in risk assets, the weakening of Treasury prices represents a remarkable flight from quality, or “risk on” episode.
The resilience of risk assets indicates that investors have absorbed the lesson from Brexit that political earthquakes need not be financial ones, at least in the short term. From our perspective, a Trump presidency has the potential to be a near term positive for risk assets, based on the relatively high probability – given cooperation with Congress – of being able to deliver on promises of reforms that would ease regulatory burdens and reduce corporate taxes.
At the same time, protectionist policies and a willingness to initiate trade wars to “put America first” were hallmarks of Trump’s campaign. Ultimately, such policies could undermine both global and U.S. growth, drive inflation and weigh on financial markets. The tension between the positive aspects of Trump’s platform and any protectionist initiatives might be a recipe for market volatility. This could create opportunities for managers seeking to capitalize on any overreactions.
About Eaton Vance
Eaton Vance (NYSE: EV) is a leading global asset manager whose history dates to 1924. With offices in North America, Europe, Asia and Australia, Eaton Vance and its affiliates managed $334.4 billion in assets as of July 31, 2016, offering institutions and individuals a broad array of investment strategies and wealth management solutions. The Company’s long record of providing exemplary service, timely innovation and attractive returns through a variety of market conditions has made Eaton Vance the investment manager of choice for many of today’s most discerning investors.
For more information, visit eatonvance.com
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