The past week saw significant market movements in response to the U.S. presidential election, in which Donald Trump emerged victorious in a close race and appeared poised to take both the House and Senate, paving the way for his policy agenda.

Election-Fuelled Market Movements

Initially, U.S. markets reacted positively to Trump’s win. The “Trump trade” saw U.S. equities rally sharply, with the Dow, S&P 500, and Nasdaq all posting gains of over 2.5% the day after the election, while the Russell 2000 surged around 6%. Small-cap stocks, often more sensitive to domestic policy, were among the top performers. This “Trump trade” reflected optimism over potential pro-growth policies but quickly lost steam as investors reassessed the broader implications.

High-Risk Sector Winners and Volatility

Despite the initial gains, volatility quickly settled, with notable activity in high-risk sectors like big tech, where companies like Tesla drove NASDAQ’s outperformance. Small-cap stocks in the Russell 2000 also surged initially but carry a greater risk profile, especially in a potential higher interest rate environment. These segments, including the high-growth "MAG7" tech stocks, have shown impressive returns, but with twice the volatility of the overall market, they remain vulnerable to rising rates and fluctuating market sentiment.

Global Divergence in Market Reactions

European equities, represented by the Euro Stoxx 50 index, fell 1.4% as U.S. stocks rallied. This divergence reflects concerns over potential U.S. tariffs and trade restrictions, which could disproportionately impact export-dependent Europe. Political uncertainty in Europe, especially in Germany with the possibility of a snap election, also weighed on sentiment.

Bond Yields and Inflation Expectations

Following the election, U.S. and Australian bond yields surged, reflecting inflationary expectations. U.S. 10-year Treasury yields jumped 17 basis points initially but retreated by 9 basis points as the “Trump trade” unwound. In Australia, however, yields continued to climb, signalling market concerns about inflation under Trump’s policy direction. The discussion raised concerns about potential wage pressures and rising inflation expectations due to policies, particularly immigration reform, which might limit labour supply and drive wages higher in some regions.

Currency Markets and Global Dynamics

In foreign exchange markets, the U.S. dollar initially strengthened, only to reverse gains by the week’s end. The Australian dollar was a standout, gaining nearly 1.6% against the U.S. dollar, while the Japanese yen and British pound also saw modest gains. These movements highlight a shift in investor confidence, with particular focus on regions that may benefit from Trump’s policies or experience less direct impact from U.S.-focused policy shifts.

Central Bank Policies and Rate Cuts

Central bank decisions last week aligned with market expectations but highlighted the cautionary stance of policymakers. The U.S. Federal Reserve cut rates by 25 basis points but signalled no urgency for further cuts, while the Bank of England also cut rates by 25 basis points, stressing gradual future adjustments. These moves indicate a cautious approach in light of shifting fiscal policies, with central banks positioning for potential volatility in the months ahead.

Sectoral Impact and Australia’s Market Dynamics

In Australia, banks emerged as major beneficiaries in the wake of the election. The local market saw significant activity in the financial sector, with banks benefiting from the post-election momentum. However, concerns remain over high valuations in this sector, with potential constraints on credit growth. Meanwhile, sectors like utilities, energy, and materials lagged, reflecting broader uncertainties about the impact of Trump’s policies on global demand for these resources.

Looking Forward

Overall, after an initial sharp "Trump trade" market reaction, movements became much more mixed as the week progressed and focus turned to the uncertain economic implications of potential Trump policies. Investors remain attuned to risks around trade and tariffs in particular. While U.S. economic data continues to outperform expectations and support risk assets for now, markets are likely to remain sensitive to policy signals from the incoming administration in the months ahead.