Markets stirred as Trump elected next US president

Donald Trump’s unexpected election victory sent global financial markets on a rollercoaster ride as investors grappled with the prospect of the controversial Republican candidate becoming the 45th president of the United
States. There were mixed reactions immediately following the US election result. For example, Australia’s S&P/ASX2001 share index initially fell almost 4% but recovered shortly after; the Mexican Peso plunged more than 10% against the US dollar; and the US S&P5002 share index actually gained 1.1% by the end of the next day’s trading.

Markets have since had time to absorb the early
implications of the Trump presidency, including Trump’s proposal to cut taxes and increase US government spending. But it is still very much a case of ‘wait and see’ and investment markets are expected to remain on watch until the new president officially takes office.

Full steam ahead for share markets

Australian and international share markets have been in good form over the last six months, with both local and offshore investors encouraged by an overall improvement in market sentiment and more recently, by the optimism surrounding US president-elect Trump’s promises of fiscal stimulus.

Australia’s S&P/ASX300 Accumulation Index3 gained 4.93% over the quarter ending 31 December 2016 and overseas shares, measured by the MSCI World ex Australia Index4, achieved a return of 7.68% over the quarter. The Australian share index is 10.43% higher for the financial year to date and the overseas shares index gained 9.78% over the same period.

Global bond markets sell-off with expected US rate rises

When bond yields rise, bond prices fall. This relationship has been very apparent over the last few months of the 2016 calendar year. The recent shift in bond markets has been mainly driven by expectations of increasing inflation in the US, a direct result of fiscal policy promises from US president-elect Donald Trump.
  The potential for stronger inflation saw a dramatic effect on global bond markets as investors sold out of bonds fearing a rise in interest rates in the near term.

The Australian bond market, measured by the Bloomberg Ausbond Composite 0+ Yr Index5, fell 2.86% over the December quarter and dropped 1.96% over the financial year to date.

US Federal Reserve raises rates and signals more to come

The US Federal Reserve increased US interest rates by 25 basis points (to a new federal funds rate target between 0.50% and 0.75%) and also signalled a faster pace of rate rises for the new calendar year at its latest meeting in December 2016.

The rate increase comes as US economic conditions show marked improvement, including a decline in official unemployment, strong gains in the job market and improving inflationary conditions.

The latest move by the US Federal Reserve represents a vote of confidence for the world’s largest economy and could see a lift in market sentiment on broader global economic conditions.

Australian economic growth slows to lowest level since the GFC

Australia’s key economic growth indicator, gross domestic product (GDP), slowed to the lowest level since the depths of the global financial crisis in 2008, falling 0.5% over the September quarter and growing only 1.8% for the year
ending September 2016.

The slowing of GDP growth is largely due to a fall in government spending, weak business investment and declining home construction. The slump in Australian growth conditions may cause concern for policy makers such as the Reserve Bank of Australia, who recently kept
Australian interest rates on hold at their latest meeting in December 2016.

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S&P/ASX 200 Index includes up to 200 of Australia’s largest shares by float-adjusted market capitalisation

2 S&P 500 Index includes 500 leading US listed companies and covers approx. 80% of available market capitalisation

3 S&P/ASX 300 Accumulation Index includes up to 300 of Australia’s largest shares by float-adjusted market capitalisation

4 MSCI World ex Australia Index (unhedged in AUD) covers 22 of 23 developed markets excluding Australia

5 Bloomberg Ausbond Composite 0+ Yr Index comprises different types of investment-grade Australian bonds