Donald Trump and Beppe Grillo
Donald Trump is the next US President. The world was stunned. Republican has also won majority seats in Congress, beating the Democrats in both the Senate and the House. On 8 November, the actual day of election, Asia markets panic and came off on the back of Trump leading the race. Europe opened low. Surprisingly, US market opened strong and seemed to be celebrating Trump victory. The S&P 500 index rallied 3.4% from 2131.52 to 2204.72 from 7th November to 23rd November. Trump made comments about removing Obamacare and Dodd Frank. Healthcare stocks and banking stocks put on a massive rally. Pfizer and Merck were up 3.4% and 2.6% from 7th to 24th November. JP Morgan share price went from USD 69.88 to USD 78.86, up 12.9%, in the same period. Citibank, Goldman Sachs, Morgan Stanley, Bank of America Merrill Lynch all went up 13.8%, 17.0%, 20.7% and 20.9% respectively in the same period.
The market took Trump America first gesture very seriously and the USD strengthened against all major currencies. USD JPY moved 8% from 104.2 to 112.6 between 8 November and 24 November. The Chinese Yuan weakened from 2.3%, the EUR and GBP also lost 5% and 0.4% against USD. Gold also dropped to USD 1180 level as investors expect US Fed to increase interest rate in December. A strong currency with an expectation of a rate hike attracts a lot of money. The USD strength may be fiercer than anyone could expect. But there were signs. Bank of Japan has been waiting for this opportunity to welcome a strong USD. Remembered when Bank of Japan announced QQE in October, the market did not react much. The market knew Bank of Japan is running out of tricks to depreciate JPY as the market was willing to bet that Bank of Japan cannot push JPY weaker. However, Bank of Japan can wait for a stronger USD and the US President Election was the catalyst. As JPY weakened, the Japan stock market has been strong. Nikkei 225 has rallied from 7% from 8th November to 25th November. On the other hand, Eurostoxx 50 rallied 1% from 7th November to 24th November. FTSE100 went up 0.3% in the same period. Banking stocks in Europe also enjoyed a nice rally. HSBC went up from GBp 59.15 to GBp 61.45 from 7th to 24th November. Lloyds, Barclays, Duetsche Bank, Credit Suisse and BNP were up 6.4%, 16.3%, 11.0%, 11.3% and 5.3% respectively in the same period.
December could be a difficult month for Europe with the Italy referendum taking place on 4 December. Could this be the 3rdpolitical surprise this year after Brexit and Donald Trump? Mr Matteo Renzi, Italy Prime Minister and leader of the centre-left Democratic Party, is putting up a referendum to reduce power from Italy’s 20 regional governments and the Senate. It is a threatening tactics and Mr Renzi is saying to voters either to give him more power or he will step down. A bit aggressive from an Italian in some eyes. The flip side of passing this referendum is that if the Prime Minister is a disaster, the Senate can do very little and Italy will be stuck with the wrong leader for 5 years. If the referendum dose not get pass, Mr Renzi is likely to step down. Then Mr Beppe Grillo, a former comedian and leader of the Five Star Movement, may get a shot at the top job. The former stand-up comedian is outspoken and he wants to abandon the euro. Five Star Movement is an anti-establishment party and they want to leave the Eurozone. Italeave may become a real word rather than a joke on Twitter. If the outcome is yes, Mr enzi gets the power he wants. All future Italy Prime Minister would also benefit from it and enjoy a 5 years guarantee mandate. Such power could be mis-used and may not be good for the country in a long run. Especially if the next Prime Minister is Mr Grillo, Italeave may happen. If the outcome is no, Mr Renzi steps down and Mr Grillo may also be the next Prime Minister. Mr Grillo may call a referendum on abandoning the euro. At least, there will be balance from the Senate and the Chamber of Deputies and Mr Grillo may not get what he wants. Either way, Italy is clearly at a point of unstable equilibrium and more conflicts within the country is expected. Yes may mean short term positive for the Euro and no could trigger panic selling.
