The FTSE 100 soared on Wednesday as Trump won the US election to earn his second term as President of the world’s largest economy.
However, the FTSE 100’s gains evaporated in choppy trade as the US session got underway as investors assessed the implications of Donald Trump in White House once more.
Hopes of an easier regulatory regime and tax cust helped propel equities higher, but concerns about inflation also sparked a wave of buying in the dollar and sent treasury yields higher.
“US and European markets raced ahead on projections for Donald Trump to win the US Presidential election,” said Russ Mould, investment director at AJ Bell.
However, Mould went on to explain that the initial reaction was not typical of the economic realities of Trump’s policies and cautioned risk remains on the horizon.
“The dollar strengthened and 10-year Treasury yields jumped to 4.406% on the assumption that Trump’s policies will stoke inflation and require interest rates to stay higher for longer. That sustained the rally in US Treasuries which has been in motion since mid-September when they traded at 3.623%.
“Trump’s desire to cut taxes and make things easier for businesses to operate should in theory give a near-term tailwind to US shares, with futures prices implying a strong opening to Wall Street later. The S&P 500 is indicated to open 2% ahead and the Nasdaq up 1.7%.
“The impact of higher inflation on corporate profit margins, and how interest rates might not come down as fast as previously expected, are real risks for investors to consider once the dust settles.”
Despite the abundant risks to the equity universe, most FTSE 100 shares were higher at the time of writing.
BAE Systems and Rolls Royce were over 3% higher on hopes of continued robust US defence spending. Ashtead was among the top risers, with investors eyeing a ramp-up in construction and infrastructure spending by Donald Trump.
The Scottish Mortgage Investment Trust enjoyed renewed optimism around tech shares with a 2.3% gain.
The stronger dollar weighed on gold prices, accelerating the unwinding of the safe-haven trade bult up before the election. This did gold miner Endeavour Mining no favours, sending shares down by 3%.
“Gold is retreating significantly today, falling below $2,700 per ounce in spot trading at the peak of the declines, erasing November’s gains,” said Samer Hasn, Senior Market Analyst at XS.com.
Persimmon was the FTSE 100 top faller, although the losses were nothing to do with the election. The housebuilder noted reasonable sales in early Autumn but warned of rising costs and the budget curtailing demand through higher National Insurance taxes.
“The housebuilding sector was supposed to be in a happier place as interest rates started to come down and the property market took a turn for the better. However, the latest update from Persimmon suggests the recovery might not be as straightforward as had been imagined,” Russ Mould explained.
“Costs are back on the rise and the company is warning of a potential impact from the Budget on this front too. The changes to stamp duty are broadly unhelpful to the business. If property prices soften then the company and housebuilding industry are back to facing the unhelpful cocktail which saw their shares come under significant pressure in recent years. Persimmon’s margins are already below long-term averages as it is.”