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European ECM deals still on course after Trump shock

Equities in Europe have reacted with resilience to this morning’s surprise that Donald Trump will be the next US president.

Europe’s main indices fell at the open but quickly bounced back, led by the recovery of the dollar from an early sharp fall.

For the moment, the clutch of European equity deals in the market stays on course. “Things are not as bad as initially thought, but it will lead to more volatility, which isn’t ideal for equity capital markets,” said a syndicate banker working on the IPO of Varta, the German micro-batteries maker. “Anything out there at the moment will continue on and we’ll see where things end up.”

The uncertainty caused by Trump could make life difficult for equity issuers, but deals are expected still to happen. “It depends on the quality of the name but initially we’ll likely see wider discounts on the first deals that come out post-election,” said another syndicate banker.

Some of the trades investors and analysts had foreseen have played out as expected. Pharmaceutical and defence companies, which have large exposure to the US, rose in anticipation that the Republicans will raise defence spending and not attack drug prices, as Hillary Clinton had threatened to do.

BAE Systems had risen 4% by noon in London and Dassault Systèmes 1.2% in Paris. AstraZeneca and GlaxoSmithKline both gained 1.7%, though this was less than earlier highs.

By noon, most benchmark indices had climbed from their earlier falls. The Euro Stoxx 50 had been volatile, but was at 1.7% down at midday, better than its worst levels. The FTSE 100 was down 0.5% and the Dax 1.3%. By the afternoon, however, the benchmarks were in positive territory.

Both the FTSE 100 and EuroStoxx are exposed to emerging markets, which are expected to suffer from Trump’s protectionist leanings. But they contain companies that export to the US, which could benefit.

The Trump victory will likely have profound consequences for global trade, security and the standing of the US in world affairs. Yet until he appoints his executive team and takes office, investors, like other people, have little idea what he will do.

“Given the uncertainty and the volatility, the market has rebounded, but right now it feels like a tricky market for primary, but we could have some surprises,” said one banker. “For primary IPOs of European companies without US exposure, the impact will be more due to the general volatility caused by the uncertainty.”

Trump’s victory is not the first surprise result of a vote that markets have digested this year, which partly explains the suspension of panic.

“What it will create is a greater level of uncertainty. It doesn’t mean that deals can’t get done,” said a head of syndicate. “Having said that, issuers will have to be sensitive to the fact that investors will be more risk-averse and will require higher discounts until we have more clarity on what kind of line Trump will take.

“As he starts to name his cabinet and what his first measures will be, if things seem to be less radical than the campaign then markets will find their way,” he added.

Blocks window

The bounce in share prices for certain sectors could cause a wave of opportunistic block trades, although sellers need more time to digest the market reaction to the news.

“Oil is doing OK, infrastructure is looking pretty solid. Pharma is enjoying bit of a relief rally,” said a head of EMEA equity capital markets. “It’s unlikely tonight but maybe [blocks] will kick off tomorrow. Investors are happy to buy, but it’s a question of whether the execution will be as good as it could be.”

Overall, ECM deals would still be able to get done, he said. “This is something that the market can take in its stride after the initial sell-off. Things will settle down and maybe even rally. We don’t think it’s a closing or a weakening of the primary market. It needs time to digest the news.”

A Federal Reserve interest rate rise in December was widely regarded as a near-certainty before the election result, and was priced in. Expectations of that have now moderated.

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