Wall Street hits record high; dollar, Treasury yields surge as Trump wins presidency

By Dhara Ranasinghe

LONDON (Reuters) -Major stock markets around the world rallied on Wednesday, while bitcoin hit a record high and the dollar was set for its biggest one-day jump in four years as Donald Trump was elected U.S. president.

Small cap U.S. stocks in particular were boosted by expectations that a Trump presidency would offer tax cuts and support domestic companies.

Though bond investors dumped long-dated Treasuries, betting that accompanying tariff hikes would increase the deficit and inflation, causing the Federal Reserve to cut rates by less than they otherwise would have, and potentially raising fears about the United States' fiscal position.

Trump, 78, recaptured the White House in Tuesday's election following a campaign that deepened the polarization in the country.

U.S. S&P and Nasdaq futures jumped more than 2%, and those tracking the small cap Russell 2000 soared 6%. The dollar index rallied 1.4% and was set for its best day since March 2023.

The rally in U.S. stock futures and signs of a decisive result cheered equity markets, with European shares up 0.9% as stock investors put aside worries about the impact of potentially higher tariffs for now.

It was a different story in emerging markets, where Mexico's peso sank to its weakest level in over two years.

"The market is definitely moving in line with the Trump playbook; stocks and small caps, in particular, are higher on the idea that Trump will be good for U.S. companies," said Seema Shah, chief global strategist for Principal Asset Management in London.

"Across emerging markets, you can see China and Europe are struggling with the idea that they could face higher tariffs, and U.S. bond yields higher with expectations for a higher fiscal deficit and inflation."

BONDS DISCONNECT

U.S. borrowing costs surged particularly for longer dated bonds, suggesting concern from investors about the U.S. deficit path.

The 30-Treasury yield rose 21 bps to 4.66% its biggest one day increase since March 2020's pandemic induced volatility, and benchmark 10 year-yields rose 17 bps to 4.47% their highest since July. [US/]

While markets were still confident the Federal Reserve would cut interest rates by 25 basis points on Thursday, they slightly reduced bets on further easing in December.

"The big challenge for markets is that if you do see tariffs come through you need to balance the short-term nature of inflation risks with the medium-term aspect of lower growth," said Justin Onuekwusi, chief investment officer at investment firm St. James's Place.

"The market appears to be thinking about inflation right now."

In contrast, European government bonds rallied, and German two-year bond yields fell 11 basis points to 2.19%, while money markets priced in lower European Central Bank rates.

"For European businesses, Trump’s return to the White House would mean considerable trade policy and geopolitical uncertainty, with negative implications for growth on the continent," said Berenberg chief economist Holger Schmieding.

CURRENCY WINNERS AND LOSERS

Bitcoin emerged as one of the clear winners of the day.

The crypto currency climbed to a record high of $75,397 and was last up 7% on the day. Trump is seen as more actively supportive of cryptocurrencies than Harris.

In traditional currencies, the euro was hurt by potential tariffs and the widening differential between U.S. and European rates, and was last down 2% at $1.070, set for its biggest daily fall since 2016's Brexit refurendum, outpacing a 1.4% fall in sterling.

The dollar meanwhile jumped 1.8% to 154.38 Japanese yen,, and gained 1.5% on the offshore yuan to 7.205 yuan amid reports Chinese banks were selling dollars to slow the yuan's decline.

China is seen on the front line of tariff risk, and its currency in particular is trading on tenterhooks with implied volatility against the dollar around record highs.

Chinese stock markets have surged to almost one-month highs as investors expect a meeting of top policymakers in Beijing this week to approve local government debt refinancing and spending. Chinese blue chips lost early gains to turn flat, and Hong Kong stocks fell over 2%.

Mexico's peso briefly dropped to as low as 20.8038 per dollar for the first time since August 2022, more than 3% below its previous close - the biggest such tumble since Mexico's election in summer roiled domestic assets.

Ukraine's international sovereign bonds rallied nearly 2 cents, boosted by bets that a second Trump term could lead to a quicker end to Russia's war in Ukraine.

The sharp rise in the dollar pressured oil prices, and other commodities, as it makes them more expensive when buying in other currencies. [O/R]



U.S. crude shed 1.8% to $70.68 per barrel, while Brent fell 1.8% to $74.18

Gold prices dipped 1.6% to $2,700 an ounce, off a recent record peak of 2,790.15 [GOL/].

Source: Investing.com