Donald Trump’s US Presidential Election victory on 8 November proved to be the latest and, hopefully, final political curveball that has wrong-footed pundits, pollsters and the markets in 2016. Dan Hughes, Dealing and Trade Support Manager, reflects on the markets in the immediate aftermath of the result.
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The anticipated stock market sell-off and flight to the relative safety of US Treasuries failed to materialise following Trump’s Presidential Election victory, with the S&P, Dow Jones and Nasdaq equity indices powering to new all-time highs in the weeks following the result. US Investors seem to be in “risk-on” mode currently, as equities are bought in anticipation of increased fiscal expenditure on infrastructure projects and a lighter-touch regulatory approach on sectors such as banking and energy. US Treasuries have continued to slide, however, as the prospect of increased government borrowing, growth and inflation under a Trump Presidency have spooked the US bond markets.
Our dealers saw little immediate reaction to the election result in terms of volumes. Indeed, the value of orders traded by the desk remained steady at circa £168 million in the weeks prior to the election and in the wake of the result. The only nuance was the relatively heavy ETF volume during the week of the run-up to the election - the Exchange dealing desk saw flows totalling over £30 million in exchange traded assets as some advisers and DFMs positioned themselves ahead of the US polls.
Perhaps reflective of the markets witnessed in the immediate aftermath of Brexit, however, some fixed income ETFs exhibited bid/offer spreads wider than would be expected under more usual circumstances as market makers protected their trading books by increasing spreads and reducing the liquidity available in assets such as Emerging Market bonds. A cynic could also suggest that trading desks in The City have little incentive at this point in the calendar year to take on significant risk, especially in the face of uncertain political and economic events, as they continue to either lick the wounds inflicted by a challenging year, or to protect any profits they may have made ahead of bonus season.
Whatever the underlying reasons for these wider than usual spreads, they did highlight the importance of understanding the impact of the quality of execution on portfolio performance, particularly for those clients whose portfolios contain exchange traded assets such as ETFs or Investment Trusts. With bid/offer spreads in certain securities widening to well over 100 bps at several points in the days immediately following the election result, the importance of dealing in real time and retaining control over execution (and therefore outcomes) was again underlined as the markets were skittish as traders and investors attempted to make sense of the implications of a Trump win.
To try and make this live a bit more, we can see from data supplied by our transaction cost analysis partner that our dealing desk achieved price improvements for customers totalling over £126,000* in the month of June, with the majority of that occurring in the volatile markets following the Brexit result. In terms of the 'Trump effect' in the wider market, Tradeweb (a trading platform we utilise to execute larger ETF trades) saw record ETF trading volumes of £2.4 billion on the 8th and 9th of November (Tradeweb European ETF Update 11/11/2016), achieving average price improvements of 7.5 bps when compared to bid/offer spreads on primary exchanges.
These figures translated into £1.8 million of savings for Tradeweb’s users over the two trading days following the result. This really highlights the pounds and pence value of having the flexibility to access the most appropriate and competitive execution venues in order to attain the best possible results for customers.
*Based on the improvement on the bid/offer spreads on the LSE at the point of execution. In comparison, the total client savings for the whole of 2015 totalled £396,000.
The information contained in this page is for professional Financial Adviser use only. If you are a private investor, please visit the Private Investor section or contact your Financial Adviser for more information.