Michael B. Thomas/Getty Images; Rebecca Zisser/BI
It's fair to say that much of Wall Street didn't get enough sleep on election night after being caught off guard by the speed at which results began coming in.
Dominic Pappalardo, the chief multi-asset strategist at Morningstar Wealth, was home watching prediction markets and how percentages were skewing state by state. He was also keeping an eye on financial markets to see if they were making directional moves.
Over in London, Richard Kelly, the head of global strategy at TD Securities, was on his firm's trading floor, busy answering endless client questions on 'What about this' and 'What about that'-type scenarios.
"As much as we all tried to think ahead of what the different policies would be, there are always a lot more questions that come up on the day, and they all have to be much more concrete," Kelly said. "So it's just been a whirlwind."
Former President Donald Trump's victory over Vice President Kamala Harris has been called for Tuesday's election, but Wall Street is still waiting on one more key answer: Will Republicans take the House, too? It seems increasingly likely. Yet, the result would be based on a handful of seats.
"Technically, we don't need to know until the first half of December legally, and these things are so close in terms of the margin of error," Kelly said. "There's some of these races where literally hundreds of ballots is the differential of Republican versus Democrat. So it's not going to be today."
The small tilt in the House makes a big difference because a handful of seats are enough to create some friction on Trump policies, Kelly noted.
Sector rotations among stocks are slightly muddy because the overall market is up so much that everything rallied with the broad market, Pappalardo said. But one noteworthy sector is financials, which performed better than the overall market into Wednesday's early trading hours. It's unsurprising since the Republicans campaigned on policies favorable to banks and financial stocks, including decreased regulation. The steepening yield curve is also positive for banks as it boosts their profit margins since they borrow on the front-end yield and lend at the back-end yield, he added.
Technology is another sector the market is viewing favorably: Tech companies have been creating a lot of profit, so Trump's promised corporate tax cuts will be quite beneficial, Pappalardo said.
Meanwhile, the utilities sector lagged the broader market the most as we moved into Wednesday's early trading hours. Investors moving away from defensives toward cyclicals is likely a sign that investors believe the economy is positioned for growth, Pappalardo noted.
While the rallies are positive for stocks, looking ahead, Pappalardo expects things to return to normality. In other words, investors will focus on traditional fundamentals like corporate earnings and interest rate policy.
Wednesday was a long day for Gennadiy Goldberg, the head of US rates strategy at TD Securities. He stayed up past midnight watching the yield move before passing the baton off to his colleagues in London.
"Once the polls started to close, the market already started to move," Goldberg said. "It took the market very little time to start penciling in higher odds of the Trump victory."
The swift and strong Republican win pushed the 10-year yield up from around 4.3% to around 4.45%.
The bond market was expressing signs of nervousness. This sector of the market is worried about who's going to pay the bill for potentially higher budget deficits. The result is a pricing-in of higher debt premiums, Goldberg said.
Additionally, aggressive immigration and tariff policies could be inflationary. And if it looks like inflation pressures are either reaccelerating or just stubbornly high, it could leave the Fed nervous about cutting rates further, Goldberg said.
Kelly added that the 10-year could still move higher to 4.75%, and that's where he thinks the market could get more comfortable buying.
Jayati Bharadwaj, a global FX strategist at TD Securities, was at home in front of multiple screens until about 1 a.m. as she watched currencies move amid the strong Trump lead. Initially, she expected the results to take a few days to become clear, but she was surprised by how quickly the outcome became evident. Currency markets also reacted swiftly against the backdrop of a strengthening dollar.
"The Chinese renminbi, the Mexican peso, and the euro were hit particularly hard because once markets saw the election results being called, they had to start pricing in the threat of tariffs," Bharadwaj said.
She expects the euro to trade even weaker relative to the dollar once Trump takes office. Right now, it's trading at $1.07; expect it to move to $1.05, she said. If the Republicans take the House, then the euro could drop below $1.05, she added.
Kelly added that China has been under the microscope since Trump talked about 60% tariffs on its imports. Other countries could face 10% tariffs across the board. So, if you're highly leveraged to trade, like Europe or the UK, it could be very negative for the euro and pound. He noted that it could also be negative on the currencies of Canada and Mexico, depending on how USMCA members will be impacted.
On the flip side, the yen could weaken less than other currencies relative to the US dollar. The Bank of Japan may return to rate hikes over the next few months after it had paused, Kelly said. This means watch out for further unwinding in the yen carry trade. Therefore, the next question investors have to ask is: how many long equity positions have been funded at very low Japanese rates, Kelly said.
For this reason, Bharadwaj cautions traders about jumping back into any carry trades because there will be a lot of currency volatility.
One surprise is that gold hasn't weakened as much as expected, Kelly said. As the dollar strengthened, he anticipated a more significant pullback. Given the uncertainty and volatility that took place the day after the elections, it might be too soon as investors digest results. However, he anticipates further weakening in gold, which is down 2% from Election Day.
