There is one word on the lips of just about every Wall Streeter right now
Donald Trump won the US election in a dramatic upset that confounded the polls and sent markets reeling. Volumes in the futures market surged.
Markets then bounced back, as the world digested the news, and Trump's conciliatory victory speech. VIX futures, or bets on the so-called "Fear Index," subsided after jumping as the election results turned towards Trump.
"I was hoping the market would be some kind of chaotic arena but it's literally straight up right now," Michael Antonelli, an equity sales trade at Robert W. Baird, told Business Insider early Wednesday, referring to the rebound after the initial sell off.
Other senior figures on Wall Street echoed this sentiment. A top buyside trader told Business Insider early Wednesday that the "credit markets [are] relatively calm." A senior figure at a top high-frequency trading firm added that the initial reaction, though dramatic, wasn't unexpected.
"This was similar to Brexit in that expectations didn't come true," he said in the early hours of Wednesday. "It gets expressed through volatility. US indexes, Treasuries and dollar pairs are very volatile - which is to be expected. MXN, Japan, China and Aussie markets are all volatile."
That's the story so far. Wall Street has little confidence in what happens next, beyond the fact that we're likely in for a bumpy ride. The word volatility was repeated in just about every conversation with a Wall Streeter and every research note. The market may have taken Trump's victory in its stride, but there will be another breakout of volatility ahead.
"Recent nascent inflation will persist and pick up on the back of the US and rest of world's tendency towards more protectionism and fiscal stimulus (infrastructure spend in US and China)," Luke Sadrian, chief investment officer of Commodities World Capital, told Business Insider. "Another hard to quantify knock on effect of Trump win will be that commodity and all asset market volatility is likely to rise on the back of Trump's non-political unpredictability."
Elsewhere:
- "We expect the volatility regime to remain high as Trump has shown on several occasions that he can be unpredictable. Protectionism is an important threat for global equities (here), and Trump has expressed a willingness to renegotiate foreign trade agreements (especially NAFTA), which brings more uncertainties." - Roland Kaloyan and team at Societe Generale
- "In our view, the full implementation of Trump's policy proposals would increase the volatility of aggregate economic activity, with potential repercussions for the volatility of financial markets as well, and lead to tighter monetary policy." - Kevin Logan at HSBC
- "The market volatility is not necessarily a vote for or against Trump or Clinton, but a reflection of the uncertainty of what a Trump administration means for almost every facet of economic policy. It's unclear how much of his campaign rhetoric will translate to actual policies." - Markus Schomer, Chief Economist at PineBridge Investments
- "The bottom line, however, is that he has repeatedly proven to be a volatile character with a very thin skin. In addition, neither Trump nor many of his inner circle have any experience in government. Those factors suggest to us that uncertainty and market volatility will remain elevated for months, if not years." - Paul Ashworth at Capital Economics
- "We are heading into a world of unprecedented political risk which calls into question the pillars of the post-WWII settlement. It's unsurprising investors are heading for cover." - Dominic Rossi, Fidelity International's Global CIO of Equities
- "Volatility will almost certainly increase; the fundamental reality is that we don't know what kind of US we are now faced with given the lack of policy detail through the campaign." - RBC Capital Markets
- "Trump has no experience in government, and his tenure as President will likely be marked with unconventional, and potentially erratic, policymaking that departs substantially from the political modus operandi of the past, whether Republican or Democrat. This expectation of change was a major driver of his popular appeal, but it is likely to unsettle markets." - Tina Fordham at Citigroup
A part of this is a natural reaction. As Victor Shvets at Macquarie pointed out in a note to clients, investors are always comfortable with the status-quo. "Hence, its death tends to be highly destabilizing, until new policies acquire the same dogmatic value, he said. "But usually this is years later."
But there are two specific reasons volatility is likely to be higher over the next 12 months than if Clinton had won.
First, as Business Insider's Brett LoGiurato argued this morning, no one knows anything. The polls were wrong, and it is getting harder and harder to get an accurate read on what will happen in the future. In a market increasingly driven by politics, that has Wall Streeters unsettled.
Then there is Trump, the man himself. In simple terms, he is an unknown quantity with no experience in government at a time when the world is only getting more complex.
"Unlike Brexit [which is in limbo due to the Article 50 Trigger] this volatility spike is unlikely to die down quickly given that there is no playbook for anticipating capricious policy moves manifest via 3 AM tweet storms," Milind Sharma at hedge fund QuantZ Capital told Business Insider.
Lee Bressler, Carbon Investment Partners, echoed this sentiment.
"Who knows what this means for specific industries and markets and society," he said. "It scares the crap out of me - I think he will ruin this country for 100 years to come. Brexit brought some uncertainty but this seems like there is 500x more."