Investors also risk being caught out if the Fed does follow the more aggressive stance on rate rises that Pimco believes it will have to take. Although early suggestions following the election suggested a Trump victory would lead the Fed to take a more cautious approach to a potential December hike, his inflationary policies are increasingly expected to have the opposite effect, bringing forward any future rate hikes. Yet markets appear to be at risk of complacency regarding the potential speed and scale of hikes.
By mid-November, markets were pricing only an 18% chance of the Fed hiking once in December and twice more in 2017. “That seems very low,” JPMAM’s Stubbs says.
POLITICALLY-DRIVEN VOLATILITY
In theory, at least, Trump’s victory and likely policy direction should mark the end of the 30-year bond bull run, but that view doesn’t take account of political uncertainty.
And on this score the early evidence is not very promising. Trump’s attitude towards President Vladimir Putin is perhaps the starkest example. The chances of the US and Russian premiers agreeing a deal is unlikely without compromising the sovereignty and security of some central and eastern European countries. The alternative is a hard-man stand-off that could raise a significant nuclear threat.
According to Hermes’ Nusseibeh, markets are not paying close enough attention to the potential for political instability in developed markets, to which the Trump- Putin axis will prove key. “If Trump signals to Putin that he can continue to expand in Europe, the risk premium in Europe will go up. Markets are not discounting that,” he says.
Trump’s foreign policy decisions could also have a meaningful – although as yet less clear – effect on oil price volatility depending on how they affect developments in the Middle East.
Many experts had been watching to see who Trump would appoint as his closest advisers – appointments that don’t require Senate confirmation – and the early evidence is not reassuring. Stephen Bannon’s appointment in particular has sparked widespread protest among human rights groups and both Democrats and Republicans, given his reportedly white-supremacist stance. A weak Chief of Staff inthe form of politically inexperienced Reince Priebus adds strength to the ability of Bannon and Trump to set the agenda. Other hardliners, including Jeff Sessions to head the justice department and Mike Flynn as national security adviser, suggest the next administration will err on the more extreme side of Trump’s election rhetoric than many market participants had hoped.
