MAGA moves dominant dollar and soaring stocks

* Donald Trump elected US President in historic comeback

* Dow Jones Industrial Average surges over 1,500 points in post-election splurge

* USD breaks higher as Treasury yields post huge leap on Trump win

* Fed and BoE expected to cut rates by 25bps, guidance key

FX: USD hit a four-month high, soaring the most since the 2016 Brexit vote as investors clambered back on the Trump Trade. A new regime of trade tariffs and tax cuts is seen pushing up inflation and reducing the need for rate cuts. The dollar index recorded its biggest gain in more than eight years with the yen and euro suffering the most. A minor Fib retracement level (78.6%) of the April to September down move sits at 105.13.

EUR plunged through the October low at 1.0760 and got close to the June low at 1.0666. The April bottom is at 1.0603. Fears around tariffs hit the euro which is also struggling with major economic stagnation.  Renewed trade wars without the support to global growth that extended US tax cuts could deliver is bad for the single currency.

GBP sold off to levels last seen in mid-August with a low at 1.2833 before paring losses. Eyes are on the BoE meeting with an expected 25bps rate cut priced in. Any talk on last week’s UK Budget will be key for policy guidance.

JPY was the weakest major on the day with USD/JPY surging over 2% at one point in the day. The high at 154.69 took out the recent top from late October. The 10-year Treasury yield also broke higher to hit a fresh cycle peak at 4.47%.

AUD outperformed most of its peers along with the other commod$s. Prices did fall to a new low at 0.6511 before rebounding. The next level below is at 0.6475. USD/CAD moved higher after the sharp decline on Tuesday. The major got back to a major resistance zone around 1.3946. The loonie is highly leveraged to the US economy which is expected to grow strongly with Trump’s policies of loose fiscal and tight monetary policy.

US Stocks gapped higher, opening at record highs and moving north to close at all-time highs. The S&P 500 settled 2.53% higher at 5,929. The tech-dominated Nasdaq 100 added 2.74% to finish at 20,781. The Dow finished up over 1,500 points, by 3.57% at 43,729. The Dow and S&P 500 enjoyed their biggest percentage gains in nearly two years. Banks exploded higher, up over 10%, airlines, transports and small caps also outperformed on the Trump Trade. Elon Musk-run Tesla jumped nearly 15% while Coinbase surged over 31% after Bitcoin posted a record top above $75,000. Losers included green energy companies and retailers who risk losing subsidies and tariff hikes on China respectively.

Asian stocks: Futures are mixed. Asian stocks were up, following positive performance Stateside as betting markets had moved to Trump’s corner early on election day. The ASX 200 rose on tech and financials outperformance. The Nikkei 225 advanced above 39,000 on the weaker yen. The Hang Seng and Shanghai Composite lagged with the former hindered by tech and potential tariffs while the mainland was muted.

Gold tumbled to its worst day since early June. The strong dollar and higher yields saw the non-interest bearing bullion struggle.

Day Ahead – FOMC and BoE meetings

The Federal Reserve and Bank of England announce their latest rate decisions later today, with a rare double dose of two quarter point rate cuts expected on the same day. Both 25bps moves are close to fully priced, even though the US election result and last week’s UK Budget have altered the odds of rate cuts next year and very modestly in December. Markets will be looking at forward guidance from Fed Chair Powell and Governor Bailey to determine the future path of rates in both countries.

For the Fed, Powell will be very unlikely to comment on the election result. Instead, he will indicate a willingness to work with the new administration while focusing upon the dual mandate set by Congress and monitoring policy developments, data, and markets going forward He will probably say that the data is noisy, but in terms of that mandate, Powell will continue to cite progress toward lower inflation with core PCE at 2.7%. He can still argue that payrolls are growing at a generally somewhat cooler pace so far this year and dismiss the recent 12k payrolls print due to weather and strike distortions. Another December 25pbs rate cut is still priced at around 70%.

Chart of the Day – GBP/USD looks to BoE for support

Cable tanked yesterday on dollar strength. Rate cut bets were reined in as the terminal Fed Funds rate, expected to be 2.75% at the end of next year, moved above 3.75%, so 100bps higher. The MPC is predicted to deliver a 25bps rate cut, taking the Base Rate down to 4.75%.  But the odds of further policy easing have shifted since last week’s historic UK budget, which was seen as both pro-growth and inflationary by the OBR. This contrasts with Governor Bailey’s recent comments that “disinflation is happening faster than we expected it to” and the central bank could become “a bit more activist” in its approach.

The fiscal loosening by the government is not expected to prevent this week’s rate cut. But there’s no doubt it will be interesting to see and hear any comments from MPC policymakers. A more cautious stance might offer some support to GBP after the sharp sell-off. But a dovish title would see continued dumping of sterling.

There was a pivot zone around 1.30, which has a confluence of levels including the July interim high, the September correction low and a major Fib retracement level (38.2%) of the April to September rise. The 50% mark of that move sits at 1.2862 and the 61.8% at 1.2729.

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