The election of Donald Trump as 45th US President takes financial markets off-guard. This means more uncertainties that could hurt emerging markets and trade-sensitive assets…

We expect more market volatility in the coming weeks. The medium-term uncertainty due to Donald Trump’s unpredictable personality will depend on whether a populist or a pragmatic Donald Trump ultimately shows up.

Donald Trump will have a Republican majority in Congress but majority does not imply control. President Trump will need to work on policy compromises with his majority if he wants to implement his massive infrastructure investment and fiscal easing plans.

Last night’s election outcome has actually added policy uncertainty as the risk of a material trade conflict and a likely worsening of the US’s trade relations are starting to be discounted. The short term uncertainty translates into a a more volatile environment where emerging markets and trade-sensitive assets could be hit. US equities could do better in that context. Donald Trump’s pro-business agenda is at odds with a risk-off market reaction, and positive post-Brexit market reactions remain fresh in the memory.

US bond yields seen higher even if a December Fed hike is further delayed

Any decline in US bond yields could be short-lived as it would not be consistent with fundamentals. A longer-term rise in US bond yields could occur due to the expected widening of the fiscal deficit over the medium term and, ultimately, a more aggressive Federal Reserve reaction function. A short-term too-strong risk-off reaction could, nevertheless, prevent the Federal Reserve hiking its funds rate in December.

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by Florence Pisani, Global Head of Economic Research

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