Financial markets cratered Tuesday as Donald Trump moved toward a massive upset victory in the US presidential election, one he eventually secured earlier Wednesday morning.
US and European stock futures and benchmarks in Asia are sliding, and the Mexican peso has crashed. Safe havens including US Treasurys are rallying, meanwhile.
The way investors see it, Trump and his economic positions are less predictable than Hillary Clinton’s and do not always follow Republican party orthodoxy. And so he is perceived as more of a political risk.
That, as well as the fact that major forecasters thought a Clinton win was more likely ahead of the results, have created a surprise for investors.
While a Clinton victory would have likely boosted stocks a bit, John Higgins, chief markets economist at Capital Economics argued earlier that a Trump win could pull things in the “opposite direction.”
And as things stand in the early hours Wednesday, that’s more or less what we’ve been seeing.
The Mexican peso is down by about 12.9% at 20.6842 per dollar around 11:50 p.m. ET. By comparison, before election data starting rolling out, the currency closed the day up by about 1.3% against the dollar.
This currency has been the most watched of the election. A weaker peso has tracked higher odds of Donald Trump winning the election, given his past comments on toughening trade and immigration with Mexico.
US stock futures are plunging as well. As of 11:39 p.m. ET on Tuesday, Dow futures were down by 753 points — about 4.13%. If this plunge holds, it sets the market up for an ugly start to trading on Wednesday.
Gold is up by 3.8% at $49.50 an ounce as of 11:42 p.m. ET at $1,324 an ounce. By contrast, in early evening trade, gold fell by $6 per ounce; and it is $30 per ounce above its high during trading on Tuesday.
US Treasurys are also soared, with the 10-year yield falling more than 11 basis points to 1.736%.
And finally, Asian stocks are getting crushed. Here’s a rundown from Business Insider Australia:
- AUSTRALIA: ASX 200: -2.1%
- JAPAN: Nikkei 225: -6.0%
- CHINA: Shanghai Composite: -1.0%
- HONG KONG: Hang Seng: –3.0%
It’s worth reiterating the idea that markets see Trump as a political risk. And so, perhaps it’s useful to also consider what happened in the markets after other political shocks. Specifically, we focus on Brexit — whose populist-movement underpinning draws at least some parallels to the rise of Trump — as well as the Tiananmen Square protests.
In the immediate aftermath of both Brexit, in June, and the Tiananmen Square protests, in 1989, markets were in chaos.
On the Friday after Britain voted to leave the EU, the S&P 500 and the Dow both wiped out all of their gains for 2016, while Nasdaq fell by over 4% — the biggest one-day drop since 2011.
During the Tiananmen Square protests, the Hang Seng fell 22% in a single day, and lost 37% from its peak.
That sort of emotional response to a political shock is actually quite typical of investor (and, more broadly, human) behaviour. Unexpected and potentially destabilizing political events tend to make traders and investors nervous, which then sometimes leads to volatility in financial markets. But as history has shown time and time again, these events generally do not have a sustained impact on markets.
Last year, Giles Keating, the former head of research and deputy global CIO at Credit Suisse, and his team reviewed data on major geopolitical events in the previous 100-plus years and found that stocks generally bounced back up after these shocks.
“The large majority of individual major events — ranging from the assassination of Archduke Ferdinand 100 years ago through to 9/11 and recent events in Iraq and Ukraine — impact major stock markets by around 10% or less, with the effect being fully reversed within a month or so,” he wrote in a note to clients. “This suggests that the most profitable strategy has usually been the contrarian one of buying into price falls caused by such incidents.”
For what it’s worth, stocks ultimately bounced back after the Brexit crumble, which you can see in the chart above. Meanwhile, the Hang Seng climbed back to its peak over the year after the Tiananmen Square protests.
However, it’s also true that investor sentiment affects the market. And as of midnight, it’s unclear how investors will see a Trump presidency going forward — especially given his unorthodox and unpredictable economic positions.