Five key questions to ask about the markets today

It is going to be a volatile day on the markets. Here are five key things to watch:

1. How much do share markets fall?

This is an obvious one, but important. European markets are following Asia’s lead. Futures markets indicate that US markets might open with a sell-off of 4 per cent to 5 per cent. But don’t look only at the first indication. Look at where markets move during the day, and particularly in the final hour or two, which tends to set the tone for the day ahead. Are markets backing off their worst level when closing or still tumbling?

2. What happens to the US dollar?

There will be a lot of headlines about the Mexican peso, but the US currency is the big game here. The more investors are worried about the outlook for the US economy, the more they will sell. The dollar is currently trading around $1.12 to the euro but, as Investec economist Philip O’Sullivan points out in a note this morning, expectations that the Federal Reserve Board – the US central bank – may hold off from raising interest rates as expected in December could weaken the currency further. As a major reserve currency, a weaker dollar has ramifications all over the world.

3. What is happening on interest rate markets?

Government bond markets tend to only get attention in times of crisis. However, one implication of the Trump election may be to keep interest rates lower for even longer, particularly if there are renewed fears about growth. US long-term interest rate fell this morning and long-term German and Swiss bond yields also dropped. This trend is worth watching, as are any comments in the days ahead from international central bankers.

4. Who are the winners?

Every crisis has winners, even if they tend to be outnumbered by the losers. Gold is up sharply today as investors retreat to safety. Some stocks, such as those linked to US infrastructure investment, may also gain.

5. Where will the dust settle?

Not an issue for today, but one for the next few weeks. Investors will move out of anything risky for the moment and into so-called safe havens. A key issue will be whether this mood persists, or starts to ease a bit in the weeks ahead, as happened after the Brexit vote.