Traders bet Trump will get along with everyone after midterms

Time for the art of the deal, with Democrats and China alike? Even as most polls called the election outcome – a divided Congress and potential legislative gridlock – the market leaders during November’s bounce-back hinted at lofty expectations. Investors appear bullish on trade and fiscal policy under US President Donald Trump and the new partisan regime.

The Global X US Infrastructure Development exchangetraded fund gained 4.6% in the first four sessions of the month, far outpacing the S&P 500’s 1.6% advance.

A basket of stocks selected by Morgan Stanley as the most likely to outperform if Trump won the presidency has surged 5.5% this month, right when his legislative agenda will need more support from across the aisle. In fact, by rallying 9.1% in the six days though election day on Tuesday, the long-Trump basket has seen its largest advance since the president’s November 2016 win.

Still, some on Wall Street are quick to throw cold water on the notion of a new era of bipartisanship.

“A divided Congress is unlikely to enact a major infrastructure programme, in our view,” writes Goldman Sachs economist Alec Phillips. “While President Trump and congressional Democrats have both supported infrastructure programmes, the details differ substantially and, more importantly, Democrats might not be motivated to reach an agreement with the White House prior to the 2020 presidential election.”

And can co-operation go global? Companies with outsized exposure to China have also helped fuel the rebound in American stocks, rising 3.7% in November.

This comes with a big caveat: Trump’s more limited room for manoeuvre domestically may spur the commander-in-chief to focus on international affairs by intensifying the trade war. After all this “is an area where Trump doesn’t need congressional approval – which means in the absence of any policy-making room in the fiscal space, he could potentially double down on the trade rhetoric (there is not much else he can do),” writes Rishi Mishra, fixed income analyst at Futures First.

For now, signs that traders expect America’s clash over commerce with China to roil foreign exchange are conspicuous by their omission. The offshore yuan was little changed relative to the US dollar as the results of the vote came in.

Moreover, the one-month implied volatility of the cross, which encompasses the upcoming G20 summit in Argentina at which Presidents Trump and Xi are slated to talk trade, has likewise moderated.