Publication date: 5 December 2016 | Covering: November 2016
Monthly Briefing
- Trump wins US presidential election November 8: a seismic political shock; markets recover after initial futures sell-off
- “Trump trade”: equities rally to record highs; 10-year Treasury yield surges from 1.8% to 2.4% in weeks
- OPEC Vienna November 30: cartel agrees 1.2 million b/d production cut; first coordinated cut since 2008; oil surges
- Fed November 1–2: Holds 0.25–0.50%; December hike fully priced; political uncertainty from election not a concern
- Italian constitutional referendum December 4 imminent: Renzi’s future at stake; another populist test for Europe
- BOJ begins signalling easing; Jamaica IMF EFF; NHT J$6.5 million ceiling; rates 0, 2, 4 per cent
Trump Wins: A Seismic Political Shock
The election of Donald Trump as the 45th President of the United States on 8 November 2016 was the most consequential political event in financial markets since at least the Brexit vote, and arguably since the global financial crisis. Pre-election polling had consistently pointed to a narrow Hillary Clinton victory, and the initial market reaction as the results came in during the evening of 8 November was one of sharp risk aversion: S&P 500 futures fell by more than 4 per cent, the Mexican peso — seen as most directly exposed to Trump’s trade and immigration positions — fell to record lows, and safe-haven assets rallied. By the following morning, however, markets had undergone a dramatic reversal: equities opened higher and continued rising through the day, driven by expectations that the Republican clean sweep of the presidency and both houses of Congress would enable aggressive corporate tax cuts, deregulation, and infrastructure spending. The so-called “Trump trade” — long equities, long the dollar, long commodities linked to infrastructure, short Treasuries — became the dominant market positioning theme for the remainder of November and beyond.
The Trump Trade and Interest Rate Surge
The most significant market development in the immediate aftermath of the election was the surge in US Treasury yields. The 10-year yield, which had been at approximately 1.8 per cent on election day, rose to above 2.4 per cent by the end of November — a move of around 60 basis points in a matter of weeks, one of the fastest such moves in decades. The rise in yields reflected the market’s repricing of the expected path of fiscal expansion, inflation, and Fed tightening under the incoming administration. The Federal Reserve’s November 1 to 2 meeting, which had held the federal funds rate at 0.25 to 0.50 per cent, now seemed certain to be followed by a December hike: market pricing for December reached near-100 per cent. For Jamaica and other emerging market and Caribbean economies, the surge in US long-term yields and the simultaneous strengthening of the dollar represented a meaningful tightening of external financing conditions. The J$/US$ rate was monitored carefully through the month, and the Bank of Jamaica maintained its intervention capacity to absorb any disorderly currency movements.
OPEC Reaches Historic Production Cut Agreement
The OPEC summit in Vienna on 30 November produced an agreement to cut production by approximately 1.2 million barrels per day from October 2016 levels, the cartel’s first coordinated output reduction since 2008. The deal, which had been the subject of months of difficult negotiations following the Algiers framework agreement in September, required Saudi Arabia to accept a disproportionate share of the cuts and involved a delicate compromise with Iran, which was permitted to continue increasing output following the lifting of nuclear-related sanctions. Non-OPEC producers, principally Russia, agreed to complementary reductions. Oil prices surged on the announcement: Brent crude rose from around US$46 per barrel to above US$54 per barrel within days. For Jamaica, where the government continued to benefit from concessional Petrocaribe financing for oil imports, the rise in oil prices was an adverse development for the energy import bill and consumer price inflation, though the Petrocaribe arrangement provided some insulation against the full market price impact.
Jamaica Mortgage Market in November
Jamaica’s mortgage market absorbed the considerable external shock of the Trump election result with reasonable resilience. The immediate market turbulence was short-lived, and the subsequent “Trump trade” rally in risk assets partly offset the negative effect of higher US yields for Jamaica’s external financing cost. The Bank of Jamaica continued its signalling of an accommodative domestic monetary policy stance, which helped to prevent the rise in US long-term yields from fully transmitting into domestic mortgage lending rates. The NHT’s J$6.5 million individual ceiling and tiered rates of 0, 2, and 4 per cent continued to anchor the affordable end of the housing finance market. The end-of-year period brought typical seasonal activity in NHT loan closings, as contributors moved to complete transactions before the December/January holiday period.
Looking Ahead
The Italian constitutional referendum of 4 December is the immediate political event to watch: a Renzi defeat would trigger another episode of European political and market turbulence. The Fed’s December 13 to 14 meeting is fully expected to deliver a 25 basis point hike to 0.50 to 0.75 per cent, and the updated dot plot will be scrutinised for signals about the 2017 rate path. For Jamaica, the December quarter is traditionally the strongest for tourism and remittances, and the Christmas-season boost to household incomes supports the end-of-year property transaction cycle. The Bank of Jamaica’s ongoing monetary easing and the IMF programme’s macroeconomic discipline remain the primary domestic supports for mortgage market confidence heading into 2017.
Mortgage & Housing Finance Disclaimer: This publication is for general information only and does not constitute mortgage, financial, legal or investment advice. Mortgage products, lending criteria, interest rates and borrowing costs vary between lenders and may change without notice. Readers should obtain independent advice from a qualified mortgage adviser, financial adviser or legal professional before making financial or property decisions.
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