Markets get to grip with Hardliner Trump

<p>Financial markets have been given a rude awakening at the start of a new week as investors wake up to the fact that the ‘Trump […]</p>

Financial markets have been given a rude awakening at the start of a new week as investors wake up to the fact that the ‘Trump trade’ is not a one-way bet. Ten days after Donald Trump’s inauguration, financial markets are weaker across the board after a global backlash against some of the political decisions made by the new leader of the US.

Trump-lite proves to be a mirage

President Trump’s first days in office, which have included a flurry of Presidential orders including a controversial, and ill thought out ban on immigrants from some predominantly Muslim countries, is a clear reminder that Trump is smashing up the political status quo and this will have ramifications for financial markets.

While some expected “Trump-lite” once he actually got the keys to the White House, his actions during his first days as President suggest that we need to get used to a hard-line administration over the next four years, one that will attempt to implement even the most radical of Trump’s campaign promises. Some of these, such as the recent immigration ban, could make the US a less attractive place to do business, which will be reflected in demand for US assets going forward.

Are equities pricing in a Trump premium?

Financial markets have reacted on Monday. Since the US markets have opened, volatility has risen to its highest level in a week, and US stocks have had one of their worst opens for months, the Dow Jones is down more than 1%, at the time of writing.  Negative sentiment has also weighed on European indices.

BP and Delta take a hit from Trump

Materials and industrial stocks are the worst performing sector on the Dow Jones today, it’s worth remembering that these stocks are closely linked to sentiment around Trump, and as his recent actions have prompted mass protest around the world, it is no wonder that they are faltering. The financial and technology sectors are also weaker, after leaders of businesses within these sectors have spoken out about the potential negative effects that the Trump immigration ban could have on their employees, and on any potential business opportunities in the countries effected. For example, BP’s share price is down more than 1.5% so far today, as the Trump ban could impact its joint venture in Iraq.

Airline stocks are also coming under pressure. Delta is down more than 2% so far today, after President Trump tried to blame a technical glitch with Delta’s systems on the chaos his executive order was having on airports all over the US. This is another example of how a tweeter-in-chief can be a real risk for investors to be aware of.

Trump disrupts dollar rally

The rally in US bond yields at the end of last week, also reversed course on Monday, which limited upside for the dollar on Monday. Overall, President Trump is having an impact on markets, both to the upside and to the downside. However, it’s too early to say that the US is experiencing rising levels of political risk. For example, even though the Vix index, Wall Street’s fear gauge, has risen on Monday, it is only at 12.69 (at the time of writing), which is well below the yearlong average at just under 15. If we see volatility rise above 15, then we may see a “Trump” risk premium start to weigh on US equities in the longer-term.

Earnings vs. Trump

The decline in equities is the key theme on Monday, the FX space is also exhibiting signs of risk aversion, USD/JPY is more than 1% lower so far at the start of this week. Looking ahead, there are plenty of meaty fundamentals for the markets to digest, including a flurry of top tier US corporate earnings releases and an FOMC meeting. We will have to see if this can steal the limelight from President Trump. This could be a key test for markets, if corporate results from the likes of Facebook and Apple are good, can they overcome the political risks poised by this rooky President?

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.