President Trump and the Rand slump

First static, then panic

International markets sank in the east on Tuesday, with Asian indexes leading the market down by 4% at midday. The S&P futures market was pricing large losses for the 500 largest US companies and the Rand had weakened by 5%.

The slide slowed early on Wednesday morning, when it became clear that the Republican Party would register a surprisingly comprehensive victory over the Democratic Party. Following the official victory of Trump, markets were not sure how the day would play out. It was almost as if markets had gone into shock at the news that the widely written-off candidate had prevailed.

The President-elect then delivered an unexpected and rather gracious speech, settling the frantic selling and preventing further sell offs. America then went to sleep while the rest of the world waited with bated breath for US markets to open.

The emerging market Trump slump

When markets reopened on Wednesday it was, as many had expected, carnage for emerging market currencies. Developing economy currencies were being aggressively sold and the Mexican peso had already dropped 13% against the greenback.

The Rand was not spared either and had slipped 4.7% against the US Dollar on Thursday - a slump that set a new five-year record for the currency. 

As the financial world began to stomach the prospect of a Trump presidency, analysts embarked on unpacking his policies and reforms to try and understand what the market was expected to do. As risk-off sentiment gained momentum, investors sold off USD 337 billion in bonds due to a fear in markets that inflationary pressure in the US would lead to a much more hawkish Fed.

US industrials emboldened, US tech takes a hit

Some key Trump reforms that contributed to market optimism were:

• To reform the tax code and cut business tax rates to 15%
• Renegotiate trade policies
• Cut regulation
• Promote the manufacturing sector

All the above was received as favourable by the Dow Jones. The index was the first to respond positively to the election results and went on to hit all-time highs in the days to follow. The US tech sector, however, continued to suffer losses as Trump’s anti-globalization stance is expected to hamper innovation and global integration.

Meanwhile, in South Africa

The Rand got hammered toward the end of last week. While this collapse in value was precipitated by the Trump victory, there are three important factors that contributed to the sell-off:

1. Emerging market and commodity currencies were suffering losses against traditional safe haven currencies like the US Dollar, Euro and the Pound.
2. Fund managers began to update portfolio positions as the world reacted to the increased prospect of near-term aggressive US interest rate hikes.
3. Finally, Jacob Zuma defeated a seventh vote of no confidence motion brought against him in almost as many years. This resulted in negative investor sentiment as a looming credit rating review sits just around the corner.

All of these factors hammered down the Rand’s potential to ride through this period of uncertainty unscathed. The local currency settled at USD - ZAR 14.20 for the weekend, 7% weaker than a week before.

What may the weeks ahead hold for the global market?

Attention will remain on the US in the weeks to come. This week, President-elect, Trump announces his advisers and Fed Chair Janet Yellen will provide an economic outlook. These are both important for the Rand, as the former will give us an idea of how Trump will engage with the developing world economies. The latter will be of interest as it is rumoured that Yellen’s days are numbered now that the Republicans have seized control of the government.

Anton van Teylingen is Sable International’s Forex Operations Manager. Read more about why he thinks the Rand remains a globally traded currency.