Trump’s era of isolation fails to set markets alight
City Index January 20, 2017 11:34 PM
<p>Donald Trump has become the 45th President of the United States of America, and the markets reaction, so far, has been fairly muted. But, as […]</p>
Donald Trump has become the 45th President of the United States of America, and the markets reaction, so far, has been fairly muted. But, as the markets set off for the weekend, Trump’s first address as President, gives investors a lot of food for thought.
A departure from Trump’s post –election tone
Today’s speech had a very different message and tone to the speech that Trump gave in New York on election night, which triggered a major rally in US financial assets. That speech was extremely conciliatory and Presidential in tone. Today’s was a big departure from that. He admonished the establishment who were standing right next to him, he expounded the benefits of America First, and his speech struck multiple notes on protectionism, from manufacturing, trade, jobs, defence and foreign policy.
Should Trump target robots, not foreign workers?
While Trump said that protectionism would lead to prosperity and strength, history suggests that it does no such thing. This address was short on detail, and there was, as expected, no information about his future economic policies. However, Trump has set the bar high, when it comes to the US economy, including pledging to create 25 million jobs and double the current rate of GDP. This will be tough to achieve, especially since most the jobs lost in the last decade in America are not because of foreign workers, but instead because of robots who don’t have passports. So, will Trump try to roll back recent technological progress to reach his goals?
He also made interesting comments that could impact the entire world order. He stated that it should become the norm for countries to think of themselves first, which does leave questions about America’s position as the de facto leader of the free world. If Trump’s America is stepping away from this role, then this could leave a power vacuum, which has the potential to trigger volatility in financial markets.
Trump’s new political reality: going back to the 1950s
The first speech from the new President also had a nostalgic tone, and under President Trump it looks like the US is looking to the past for inspiration about how to mould the future. This is indeed unusual, but it is the new political reality.
As investors and traders pack up for the weekend, Trump’s first address leaves a lot of food for thought. The market reaction has been muted, although the dollar and stocks did retreat during Trump’s inaugural address. US Treasury yields moved in a very small range, the 10-year yield moved in a 2 basis point range while Trump was talking.
Trump fails to set the markets alight
As we said at the start of this note, compared to his speech back in November, Trump has not had the same lightening effect on financial markets. We will be watching three things on Monday, to try and gauge whether or not the market thinks Trump is a buy or a sell for risky assets
- What the lead indicators do at the start of next week. We will be watching the Dow Jones Transportation Index and the Russell 2000; the latter is testing 50-day sma support. If it breaks below this level then we could see broader declines on the US stock markets.
- Will US financials and industrial sectors lead any decline in US markets? These sectors are sensitive to perceptions of how well Trump can implement his economic policies. If the market starts to doubt his ability to deliver on his economic promises, then we would expect further declines for these two sectors.
- The dollar, in particular EUR/USD. Could Trump’s isolationism actually help the EU to become more powerful in the world order, and could this stop EUR/USD from returning to parity, at least ahead of French elections in May?
In the next few weeks, the focus will shift to the detail of Trump’s policies. Whether or not US assets react in a bullish way to President Trump’s 100-days in office could depend on how quickly he implements his economic policies such as fiscal stimulus, job creation and tax cuts.
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.