It's Trump. All bets are off. There will be no big bank hiring in 2017. There will be no gentle continuation of the old world order. There will be no much awaited rate hike in November. It's Wednesday morning; we're in a whole new world.
If you work in finance, this is almost certainly bad. Bernstein Research points out that the Trump election could, "lead to a sharp decline in earnings through higher risk, deleveraging and margin compression," along with, "hits to investment bank earnings."
Even so, there could be some upsides.
Suddenly, being an American banker in London who's paid in pounds doesn't look so bad after all. Trump's victory has the potential to make things harder for the Eurozone and Italian bank stocks are already plummeting. Could London become a safe haven? David Davis, the UK's 'Brexit Minister' is already predicting that president Trump will encourage the EU to give the UK a better Brexit deal. Keith Wade, the chief economist at Schroders, said much the same this morning.
"Dodd-Frank has made it impossible for bankers to function," said Trump not so long ago. "- It makes it very hard for bankers to loan money for people to create jobs, for people with businesses to create jobs. And that has to stop." Does this mean that Trump will repeal Dodd-Frank? - That (even) prop traders will make a comeback?
Most New York financiers we spoke to are in shock, but can see the regulatory upsides. "I can't raise a daughter with this man as president," said one. "The only good thing is that this sidelines Elizabeth Warren."
In the expectation of reduced financial services regulation, J.P. Morgan and Bank of America Merrill Lynch today reached 52-week highs.
Post-Brexit volatility was kind to banks. Post-Trump volatility could be kind too. FX trading volumes were ten times higher than usual today and volumes are likely to remain high as convergence unwinds and investors try to price in a new and unexpected world order.
Earlier this week, Barclays strategists pointed out that while political shocks matter, it's growth and policy that matter most. While there might be outsized reactions to Trump's victory today there will also be opportunities to, "fade overreactions in either direction." Much of the mid-term outcome will depend on whether Trump's promised fiscal stimulus and trade clampdown take place. In his acceptance speech, Trump promised to double economic growth, and this has helped buoy markets.
The good news is that Trump's victory has led to an unexpectedly fast steepening of the yield curve as investors price in the impact of his fiscal spending plans and the likely need to issue more Treasury bonds. In most cases, a steeper yield curve is a good thing for banks' profitability as there's greater opportunity for them to make money on the spread.
Bonuses are an irrelevance in the grand scheme of today's events, but if you're a banker based in NYC or London, you might still give them a passing thought. They were always going to be low and may now be lower still. "I don't want to work in NYC any more," one senior fund manager told us. "Wall Street has really been hit hard, it's already difficult to find work that covers the cost of living. Even at my end."
The prospect of lower revenues and lower pay under Trump could mean that managing directors and senior financiers throw in the towel. Junior financiers are about to receive a baptism of fire. The good news is that Trump has promised to cut the top rate of income tax from 39.6% to 33%.
Remember ETFs? Remember passive index followers? Suddenly they don't look like quite such a good idea after all. Good active fund managers. Good strategists. Good researchers are all likely to be at a premium now.
Before the election result, Barclays predicted a 10% fall in U.S. equities if Trump won. This hasn't actually come to pass, and Goldman's top U.S. equity strategist is predicting that equity markets will only finish the day down 1.4% in reflection of Trump's fiscal stimulus and pro-business policies. Even so, some sectors are likely to do better than others under a Trump administration. Those sectors are indicated in the Deutsche Bank chart below.
Source: Deutsche Bank
There's nothing deal makers like less than uncertainty. Even if a Trump presidency looks ok for domestic U.S, companies, there are serious questions over the administration's trade policy. Senior M&A bankers told Financial News that M&A deals will now "take a breather" as corporates wait to assess his policies. Longer term, the good news is deals tend to track economic growth and that the sheer strength of the Trump victory will make it easier for Trump to implement his fiscal stimulus. Republicans now control the presidency, the House and the Senate.
Equally, if M&A bankers and ECM bankers are in for a hard time, infrastructure bankers and investors should be fine. Trump reiterated his intention to invest in U.S. infrastructure in his acceptance speech.
— Nomura (@Nomura) November 9, 2016
Risk is back. Banks have been fiddling with risk models all year. Now we'll know whether they've done so to good effect.
As Deutsche points out, a Trump victory would "represent a new paradigm for bond markets." A paper from the Adam Smith Institute earlier this year said banks' new risk models haven't been tested in the event of a worldwide liquidity shock - like a dislocation in the U.S. Treasury market, although that hasn't happened.
Russia bankers excepted, Trump's victory looks bad if you work in emerging markets. Similarly, this might not be the best time to work for a U.S. bank in Asia - Trump has made some bombastic comments about China in the past.. Goldman was already trimming its wings on the continent; expect greater emphasis on U.S. banks' troubled home markets.
Bernstein research suggests Trump's win is complicated for European banks on Wall Street, which have already been struggling with new capital requirements. Credit Suisse, Barclays and UBS are the most exposed.
When markets get volatile, high net worth individuals get cautious. Bernstein points out that this is bad news for private banks. Deutsche says it's also bad for 'wealth managers.' It could be even worse news for private banks that are focused on emerging markets (think Credit Suisse).