Briefing highlights
- Markets ignore Trump at their peril
The Trump trade
While their mood may have temporarily soured somewhat over the past few days, investors seem to be largely shrugging off the “controversy and chaos” of Donald Trump’s infant presidency.
Which could well alter the scenario that markets have expected since Mr. Trump’s November victory.
Remember election night, when stock futures plunged by hundreds of points as Mr. Trump became the apparent victor, only to stage a stunning comeback as he soothed markets?
His pledge of fiscal and economic programs, to borrow a phrase, made markets great again.
The shine began to dull somewhat when Mr. Trump, first at a news conference and then in his inauguration speech, gave no air time to those programs.
Now he has spent his first several days tweeting and signing executive orders aimed at Mexico and largely Muslim countries, spreading anger across the globe, though he is doing what he said he’d do.
Investors are still waiting for the economic side of the program that would justify the Dow Jones industrial average at 20,000, a level it hit with much fanfare last week, though it now sits shy of that mark.
“Investors have turned a blind eye to the controversy and chaos that has characterized President Trump’s first 10 days in the White House,” John Higgins, chief markets economist at Capital Economics in London, warned Tuesday.
“Such indifference may prove to be complacent. The longer his divisive approach to governing continues, the more likely it is that Trump will jeopardize his chances of delivering the major fiscal stimulus that appears to be discounted in asset prices.”
By early this week, the S&P 500 and the 10-year Treasury yield hadn’t changed all that much since Inauguration Day, Mr. Higgins noted, while volatility has been low.
Even now, stock markets are perking up from a couple of troubling days. So, for that matter, is the U.S. dollar, which has suffered somewhat, notably on Tuesday when the Trump team took aim at Germany and the euro.
“This lack of response may seem remarkable given the polemical executive orders and tweets that Trump has made since taking charge,” Mr. Higgins said in a report.
“While this might reflect the fact that he has simply been doing what he promised to do on the campaign trail, a more likely explanation is that none of these headline-grabbing actions has a major bearing on the near-term outlook for the U.S. economy in and of itself.”
This is not to say there has been no reaction, particularly over the last couple of days, but stocks are still riding high.
“There is no question that the events of the past week or so has shaken investor confidence in the new U.S. administration, and its ability to operate with any degree of competence, and in so doing helping gold prices post their first positive month since September,” said CMC Markets chief analyst Michael Hewson in London.
“What is surprising given the current scattergun approach to policy by President Trump, as well as his representatives, is the fact that U.S. stocks still remain within touching distance of their recent record peaks,” he added.
This could certainly hurt down the road when Mr. Trump actually tries to move on the fiscal side.
“Trump’s actions could damage his chances of getting his bigger economic policy initiatives approved,” Mr. Higgins said.
“For example, without the support of Congress, which controls the public purse, there won’t be a replacement for Obamacare or a large fiscal expansion.”
How might that affect investors?
“This is important for investors in Treasuries, who have assumed that there will be both an increase in the supply of bonds, higher inflation and tighter monetary policy than otherwise as a result of the president’s growth-boosting policies,” Mr. Higgins said.
“It is also significant for investors in U.S. equities, who have been anticipating infrastructure spending and tax cuts since Trump won the race to the White House, not to mention other developments, such as deregulation, that may require Congressional approval.”
There are many ways in which this could all play out, so it's not a given that Mr. Trump’s domestic plans would be derailed by his “style of governing.”
Things could actually turn out well for bonds, though not so good for stocks.
“Much would depend on whether he vented his frustration by becoming even tougher on foreign economic policy, over which he exercises more control,” Mr. Higgins said.
“He could turn up the heat on Mexico, China and even Germany.”
Mexico has been Mr. Trump’s favoured target, and at some point he’ll go after China as he promised.
And on Tuesday, his team in fact started in on Germany when one of his trade advisers said in an interview that Berlin is using a “grossly undervalued” euro to its advantage, comments that helped drive down the U.S. dollar.
We have seen a change in sentiment this week amid Mr. Trump’s travel restrictions and his firing of acting attorney-general Sally Yates.
But when it comes right down to it, for markets it's a “pothole,” as CMC’s Mr. Hewson put it.
That pothole, though, could well become a sinkhole.
“The events of the last 24 hours and the departure of the U.S. attorney-general have served to build up that apprehension and the risks that the investment road could well start to get even rockier with even more potholes, given the intervention this afternoon of U.S. President Donald Trump’s trade adviser Peter Navarro about German debasement of the euro,” Mr. Hewson warned.
At this point, Capital Economics still expects a stimulus package so it hasn't changed its forecasts for the markets.
“But Trump’s first 10 days in office are making us less confident that one will be enacted,” Mr. Higgins said.
“Unless he changes his tune, the current calm in the markets is unlikely to prevail.”